How Money Works

When it comes to finances, how much do you know?

If you’re like most people, you probably know very little about personal finance. I believe there are no “secrets” to financial security… and contrary to popular beliefs, financial education isn’t just for the wealthy. The truth is, financial education is for everyone-- no matter what your income level, you can achieve financial security. You just have to take the time to learn a few simple principles about how money works.

Do you know when you need life insurance the most, or for that matter, what kind? How about saving for ? Do you know the true costs of using that credit card? Taking a few moments to learn some simple concepts about how money works can save you from financial headaches later. As we take this journey together, we'll learn more about how money works and you'll find that it's really simple!

Get Down to Basics

It is said that the great football coach, Vince Lombardi, started off each training season with the statement, "Gentlemen, this is a football." Mr. Lombardi believed that the keen understanding of the basics was the key to a winning team. I believe that understanding certain basic financial rules are the key to winning the money game for you and your family.

Rule of 72

Do you know the Rule of 72? Many may say they do, but few really understand the impact it has on their money. The Rule of 72 is the basic principle that determines how fast your money grows. It’s an easy way to calculate just how long it’s going to take for your money to double. Just take the number 72 (don't ask me why "72", ask Albert Einstein... he's regarded as the one who discovered the principle) and divide it by the interest rate you hope to earn. That final number (sum) gives you the approximate number of years it will take for your investment to double.

Let's apply the Rule of 72 and look at a few examples of how it works. For instance, at 3% interest rate it takes your money 24 years to double once, because 72/3=24. Whereas your money doubles every 9 years at 8% interest rate, because 72/8=9. Take a look at the chart in the photo gallery for some examples of how money compounds according to the Rule of 72.

To sum it up, think about the Rule of 72 next time you get ready to open that .5% rate of return savings account (144 years) or 3% CD. Instead, find a savings vehicle that will give you a rate of return that matches your savings or retirement goals.


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