When working with interest rates, there's a very simple rule to remember called "The Rule of 72."
Don't ask me how it works, because it doesn't matter. The simple fact is - it works! And every financial guru out there knows this.
The Rule of 72 simply tells you how long it takes for money to double at a certain interest rate. Or how long it takes money to be worth half its value at a certain inflation rate.
It's very simple:
All you do is take your interest rate, let's say 1% - divide 1 into 72 and you get...? 72.
If you have an interest rate on your savings account at 1% annually and you have $100 in there - in 72 years you will have....$200.
Now if that was a monthly interest rate, in 72 months you would have $200.
If it was daily, you would have $200 in 72 days.
If you have a 3% annual interest rate, divide 3 into 72 and you get 24 years for your $100 to be worth $200 - now that's just if it sat there and you didn't put anything else in there.
Now here's where interest rates get tricky:
INFLATION.
Inflation is the de-valuing of the dollar.
In other words, what used to take $1.00 to buy will someday cost $2.00 to buy because the value of the dollar is decreasing. I won't go into too much economic theory on this, but part of it has to do with just how much money the Fed prints and how much money there is, and how easy it is to get the money (supply and demand).
Inflation has been at approximately, roughly, ~4% annually in general for like ever (it fluctuates but for my purposes this will suit me fine).
So, with the value of the dollar decreasing by 4% annually, for example, what cost $100 last year will cost.....$104 next year to buy the exact same thing!
GREAT! You have that in your bank account from earlier in this post.....except.....you were only getting 1% interest on it and after your first year you only have $101......technically and literally - you have less money in the bank than you started with because its value decreased due to inflation!
Frick!
At a 4% inflation rate, using the rule of 72, in 18 years, what cost $100 will cost $200 - meanwhile your bank is only paying you 1% interest.....you're losing money by having your money in the bank!!!!!
With investments you need to beat inflation. You need to beat 4%.
I won't go into specifics, just in general, an investment depends on your needs for where you are in life. If you're young, an aggressive fast growth will be vital to you, but if you're older and have your nest egg, you may not need to beat 4% - you may just want to meet it or barely beat it just to keep things going until you run out the clock.
Inflation rates are set to go sky high this year because of the Fed's spending money on the spendulus bill, the value of money is going to drop, the cost of living is going to increase and things are going to be in a major upset.
The reason for this is, the Fed spent so much money and so many bonds have been bought by China, the only way the U.S. can pay off the debt is to make the money worth half of what it is by massive and rather sudden inflation to pay off the debt at half price. Sure, China is going to get it's billions of dollars just like they wanted....but....it's only going to be worth half as much. This is why the Chi-coms are ticked at Geithner and Obama.
Meanwhile.....your savings are going to SUFFER! You will "lose" 1/4 or 1/3 or even 1/2 of your savings depending on what happens with this.
This is why I and many others are recommending putting at least SOME of your savings into gold and silver. If you're curious about how to do this see my blog on precious metals investing HERE < click here.
Precious metals can "hold" the value of your money for you. While precious metals values are influenced by supply and demand, at present and since Obama took office the price of metals (and ammunition) have gone up and up and up! I've made a very handsome profit on my precious metals investing from several years ago (about five or so) and have made about a 125% profit.
I won't get into it in too much detail but one of the investments I used to put people into was Mutual Funds because they are fairly secure (no investment is 100% secure - there's always risk - except precious metals - which if they ever become worth nothing it's because the economy is screaming along so well it won't even bother you so you're still good to go.....or we've hit armageddon and nobody's going to sell you anything because we're just trying to survive).
But in short, that's the rule of 72 and how to calculate your interest rates and its impact on your financial well being.
I will finish with this note: Banks have their benefits to our economy and society, I'm not going to paint them as evil because they fund a lot of projects in the U.S. and the current mess has been nearly entirely engineered by the government forcing them by law to lend to people that shouldn't be taking out loans. But at the same time, banks lend money for 6-12% interest or more....meanwhile they use your money in your account for them to borrow against and they only pay you 1%.
Go beat inflation!
