Rule of 72: What Every College Student Needs to Learn

Getting a handle on personal finances often feels more complicated than it truly is, especially for college students. Many students are intimidated by a subject they aren’t familiar with. However, what you don’t know can hurt you when it comes to money.

College exposes students to a wide variety of subjects and materials. Unfortunately, many students forget much of what they learn after graduation, including financial concepts. This is problematic because financial literacy teaches valuable lessons for a lifetime. While much of the high-level theory taught in class may feel disconnected from everyday concerns, students need simplified financial principles to understand and apply. A great place to start is the Rule of 72, a straightforward concept with a powerful and practical message.

What Is the Rule of 72?

The Rule of 72 is a simple way to estimate the time value of money. It’s an effective method to calculate how long it will take for an investment or loan balance to double at a specific interest rate—and it’s simple enough to calculate without a calculator!

Here’s how it works:

1. Take the number 72.
2. Divide it by the interest rate.
3. The result is the number of years it takes for the balance to double.

Example 1: Imagine an interest rate of 6%.

72 / 6 = 12

This means it will take 12 years for the balance to double.

Example 2: Let’s say you have a loan balance of $10,000 at 9% interest.

72 / 9 = 8

If no payments are made, the balance would grow to $20,000 in 8 years due to compounding interest.

Unlock the Power of the Rule of 72

The Rule of 72 is a handy rule of thumb that becomes even more powerful when applied thoughtfully. Mastering this concept can enhance your financial literacy and decision-making skills.

1. Improve Purchasing Decisions

Using a credit card can significantly increase the cost of your purchases due to interest charges. Credit card companies rely on consumers to make unaffordable purchases, which then accrue interest. By using the Rule of 72, you can estimate how quickly interest will accumulate on a big-ticket purchase. This insight can encourage you to save up and pay with cash or a mix of cash and credit, reducing overall costs.

2. Boost Long-Term Savings

The Rule of 72 can also be a powerful tool for estimating long-term savings growth. For instance:

• At a 12% return, $20,000 would double to $40,000 in 6 years (72/12 = 6).
• At a 2% return, it would take 36 years (72/2 = 36).

Understanding the impact of different rates of return can inspire you to explore investment options, ultimately teaching you the importance of saving and growing your money.

3. Enhance Personal Budgeting

Many people carry revolving credit card balances and student loan debt while keeping extra money in the bank. This behavior often stems from a lack of financial literacy.

When you understand the Rule of 72, you begin to question these habits. For example, maintaining a “cash-rich but debt-laden” lifestyle may feel safe but is often counterproductive. Every month, while debt accrues interest, cash reserves may sit idle or earn minimal returns. Instead, adopting a strategy of personal austerity can help. By cutting current expenses and channeling surplus cash toward debt payments, you can eliminate long-term debt more effectively.

The Bottom Line

Financial literacy is about more than just understanding theories; it’s about applying them to improve your financial health. The Rule of 72 is a powerful tool that simplifies the complex world of interest rates and compounding. By mastering this rule and incorporating it into your decision-making process, you’ll be better equipped to navigate your financial future confidently.