In managing your finances, it is important to know how you can make your money work harder than you. Most people work hard for money while at the same time they do not know that their money is shrinking with time. Why because any money that does not grow, SHRINKS. It is because of this one enemy of your money “inflation”.

What is this “inflation”? Inflation simply means the rate in which the value of money decreases over time - this is a lay man terms. This means a burger costing $0.50 ten years ago now is costing you $1.50. So what is the inflation rate? $1.50/$0.50 = 3 which means it cost you 3 x more money to buy a burger now than 10 years ago. The price has increased by 300% over the past 10 years which means per year inflation rate would be 30%. If this is the case that means the value of your money decreases by 30% every year. Which will also means if you have a saving of $100,000 ten years ago and you did nothing about it, now would have only worth $30,000.

Of course the example I have given is extremely illustrated. But can you imagine working hard year after year and saving all that you can, only to realize that you do not have enough. It is therefore important to know how to grow your money in rate higher than the inflation rate and not by working harder but by making your money work for you. For that reason it is very important for anyone who wanted to achieve financial success to understand this basic rule in growing your money “Rule of 72″

This is a simple rule whereby you can know the time and the rate of growth require to double your money. Let’s say that you put your money in the bank and your bank gives you an interest rate of 5% per year (not many banks out there can give you this rate), so to know how long it will take you to double your money, you just need to take 72 and divide it with 5, 72 / 5 = 14.4 Years isn’t it too long? what happen if the interest rate is higher? let us assume it at 20% per year. 72 / 20 = 3.6 Years. Why is it 3.6 years and not 5 years? 20% x 5 = 100% right then why is it you can achieve it at a faster rate? This is called the power of compounding.

At this moment, I had to caution you though that, the power of compounding can works against you. Lets take the example of Credit Card rate which is averagely at 24 % per year, which means every time you borrow money from the bank or from the credit card companies, you are making their money double and cutting your money or wealth by half in less than 3 years. That is why this concept is very important for you to understand for a better financial life.

How do you use this rule 72 in actual life situation? By understanding the nature how your money works, it is important to know the rate of return for any place you are going to put your money into. The higher the return, the faster your money grow and the harder it will works for you. Now that you know placing your money in the bank will not help your financial problems, so you need to look for other alternatives.

Most people afraid to look at higher return because of the myth or belief that higher return will also means higher risk. This is not necessary true. We will discuss on risk in another topics. In any case if you want to grow your money faster, you definitely need to look for a higher return according to the Rule of 72. Now that you understand this, I hope that this rule help you to solve much of your investment decision you need to make.

Cheer to your Financial Success.

Leo Enoch