How The Rule Of 72 Is Used By The Banks To Rob You
An Overseas Filipino Worker (OFW) started to work abroad. Having worked for several years there at the age of 29 had a total savings of P 100,000.00 (Philippine peso)
Because the only mode of investment he knew about was to put his money in the bank, he placed his P 100,000.00 in the bank. Of course, the bank manager was delighted when he opened the account. He even recommended that the money be placed in a time deposit account in order that it would yield 4 % per annum, a much more higher interest rate than an ordinary savings account.
So he placed his money in the time deposit account and waited until he reached the age of 65. At the age of 65 he went back to the bank and asked to withdraw the P 100,000.00 in his time deposit account. Lo and behold his P100,000.00 already became P 400,000.00 because of the interest. So he withdrew his money from the bank and lived happily ever after.
Is this a "live happily ever after" story or not? Do you consider this OFW as somebody who has "wisely" handled his money? Is he really earning the maximum potential for his money or is he making somebody else rich.
The rule of 72 gives us the answers to the above questions. This rule determines how many years it will take your money to double. The rule is expressed in this very simple equation: 72 / interest = No. of years it takes for your money to double
For this certain OFW, his money will double every 18 years. This is simply solved by applying the rule of 72 which is computed as follows: 72 divided 4 % per annum = 18 years. This means that if you add 18 years from the time he deposited his money, the P 100,000.00 will double to P 200,000.00 when he reaches the age of 47. After 18 more years when he reaches the age of 65, his money will already become P 400,000.00.
Now that the P 100,000.00 is in the bank's hand, what do they do with it ? Well they basically invest it in other vehicles of investments which gives them a higher interest rate such as mutual funds, the stock market, the money market, government bonds, corporate bonds etc. They even use it to loan it back to the depositors at a much more higher interest rate. But let's just say that all of the bank's investing activities gave a return of 12 % per annum. Using the rule of 72, it can be determined that the same amount of money will double every 6 years. (computed as follows: 72 divided by 12 % interest = 6 years)
So when the OFW went back to the bank after 36 years and claimed his P 100,000.00 the bank manager gladly gave him back his P 100,000.00 plus the interest of P 300,000 amounting to P 400,000.00. After all they already made P 6 million pesos out of the OFW's P 100,000.00. Now isn't that hi-way robbery?
Think like the bank if you want to be more wealthy and a more better steward of your money ! The Rule of 72 works ! Make it work for you ! - 23200
Because the only mode of investment he knew about was to put his money in the bank, he placed his P 100,000.00 in the bank. Of course, the bank manager was delighted when he opened the account. He even recommended that the money be placed in a time deposit account in order that it would yield 4 % per annum, a much more higher interest rate than an ordinary savings account.
So he placed his money in the time deposit account and waited until he reached the age of 65. At the age of 65 he went back to the bank and asked to withdraw the P 100,000.00 in his time deposit account. Lo and behold his P100,000.00 already became P 400,000.00 because of the interest. So he withdrew his money from the bank and lived happily ever after.
Is this a "live happily ever after" story or not? Do you consider this OFW as somebody who has "wisely" handled his money? Is he really earning the maximum potential for his money or is he making somebody else rich.
The rule of 72 gives us the answers to the above questions. This rule determines how many years it will take your money to double. The rule is expressed in this very simple equation: 72 / interest = No. of years it takes for your money to double
For this certain OFW, his money will double every 18 years. This is simply solved by applying the rule of 72 which is computed as follows: 72 divided 4 % per annum = 18 years. This means that if you add 18 years from the time he deposited his money, the P 100,000.00 will double to P 200,000.00 when he reaches the age of 47. After 18 more years when he reaches the age of 65, his money will already become P 400,000.00.
Now that the P 100,000.00 is in the bank's hand, what do they do with it ? Well they basically invest it in other vehicles of investments which gives them a higher interest rate such as mutual funds, the stock market, the money market, government bonds, corporate bonds etc. They even use it to loan it back to the depositors at a much more higher interest rate. But let's just say that all of the bank's investing activities gave a return of 12 % per annum. Using the rule of 72, it can be determined that the same amount of money will double every 6 years. (computed as follows: 72 divided by 12 % interest = 6 years)
So when the OFW went back to the bank after 36 years and claimed his P 100,000.00 the bank manager gladly gave him back his P 100,000.00 plus the interest of P 300,000 amounting to P 400,000.00. After all they already made P 6 million pesos out of the OFW's P 100,000.00. Now isn't that hi-way robbery?
Think like the bank if you want to be more wealthy and a more better steward of your money ! The Rule of 72 works ! Make it work for you ! - 23200
About the Author:
Would you like to know more about investment strategies ? Visit the blog of Zigfred Diaz where he blogs about several interesting topics such as investments, money management, business, making money online and Stock market investing
posted by X - Men @ 1:30 AM
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