The Rule of 72
The Rule of 72 is a formula used by investors to approximate when an investment, with a fixed annual interest rate (APR), will twofold. If you divide 72 by the APR, it’s possible to get an estimate of how many years it will take for your money to double.
|
Annual Percentage Rate
(APR) |
Rule of 72 Estimate
|
|
1
|
72.00
|
|
2
|
36.00
|
|
3
|
24.00
|
|
4
|
18.00
|
|
5
|
14.40
|
|
6
|
12.00
|
|
7
|
10.29
|
|
8
|
9.00
|
|
9
|
8.00
|
|
10
|
7.20
|
|
11
|
6.55
|
|
12
|
6.00
|
|
13
|
5.54
|
|
14
|
5.14
|
|
15
|
4.80
|
|
16
|
4.50
|
|
17
|
4.24
|
|
18
|
4.00
|
|
19
|
3.79
|
|
20
|
3.60
|
|
30
|
2.40
|
|
40
|
1.80
|
|
50
|
1.44
|
Example
You invest $5,000 at an interest rate of 6%.
72 ÷ 6 = 12
It will take 12 years for you to get $10,000 from your initial investment of $5,000 at 6% APR.
Buying a House
Buying a house is probably the most important decision any family ever makes. The process involves making a series of choices that will influence not only where you live, buy how you live and how much money you’ll have to live on at the end of the month. Whether you’re buying your first house, buying a bigger house, or considering the purchase of a vacation home, it’s important to consider the emotional and the financial implications of every decision you make along the way.
Where You Want to Live
You probably have a good idea about where you want to live—the state, the city, and the town, maybe even the neighborhood. Choosing your home’s location involves many considerations:
- Do you prefer an urban, suburban, or rural environment?
- Do you want to be close to family or work?
- Is public transportation easily accessible?
- Does the community have the stores and facilities you prefer?
- How are the local schools?
- Can you afford the property values, including taxes and insurance?
- Are the neighbors likely to be “your kind of people”?
How Much House is Affordable
Lower interest rates on mortgages and the growing availability of zero-down payment loans, and even negative equity, have made it possible for many families to buy homes they never could have afforded in the past. Unfortunately, some experts say this “creative financing” is also driving up real estate values, making families overextend themselves just to get a nice three-bedroom house in a relatively safe community.
Getting pre-qualified or pre-approved for a mortgage can help answer a big part of the financing question, because the mortgage lender will ask you a series of questions and use the information to determine how much money they’re willing to lend you. Among the things mortgage lenders consider are:
- Your credit history.
- Income and income prospects, since you’ll be paying off your mortgage for 15 to 30 years.
- Debt and other financial obligations. The more money you owe to to other creditors, the less money is left at the end of the month to pay a mortgage.
- The amount of a down payment. The more cash you put down on a house, the less money you need to borrow.
- Mortgage type, because lenders want you to be able to make monthly payments on time. They’ll tell you how much of a payment they think you can afford.
Feeling at Home in Your New House
The most important consideration in buying any house is to make sure you’re going to feel at home once you get there. If you’re struggling every month to pay the mortgage, or you’re all fighting for time in the only bathroom, you’re going to wish you could rewind the clock, do proper research, and make a better decision.
Take the time to find the right house at the right price; it’s worth the effort.
Buying a Car
The first choice most people make when they decide to get a new car is whether or not the car has to be brand new. There are many advantages to buying a pre-owned vehicle, price being chieft among them. A car’s value declines substantially over time, so buying a car that’s just a year old can slash several thousands of dollars off the purchase price.
Buying a New Car
When you buy a brand new car, you don’t have to worry about possible mistreatment from previous owners. You get to choose the options and features you want, and you get to inhale that new car smell. You also have more room to haggle with dealers, because if one dealership doesn’t meet your price, the one down the road just might.
Buying a Used Car
The main risk in buying a used car is the unknown. It’s not always easy to determine if a used car is in good shape. Once you provide the vehcile identification number, research sevices can tell you a great deal about your car’s history. Some used car dealers will also warranty used cars to protect against any hidden defects. Pricing used cars is a challenge because you have to consider the car’s history and condition, which are never the same for any two cars.
How to Save Money on Your Next Car
When buying a car, the best defense is a strong offense, which in this case is supported by all the information available on the Internet. You can learn the approximate value of any car fairly easily with a few visits to manufacturer’s websites, discount superstores, and independent car buying services, like Edmunds and Kelly Blue Book. A few hours spent entering makes, models, and options can help narrow your possible choices before you even leave the house.
After some time researching, you should focus on a few specific makes and models. Learn as much as you can about them, and make lists of the options you need, the options you want, and the options you can do without. Remember some items, like sounds systems, can be added later.
Consider All the Costs that Drive Up the Price of a Car
The car’s make and model and the options you pick all have a big impact on the overall price. But don’t forget the other costs you’l have to eventually pay, like repair and maintenance, gas, insurance, taxes, registration, and delivery costs. You may be able to afford the payments on a new SUV, but can you afford to fill it up with gas a couple times a week to meet your commute to work?
Establish the extra costs involved in purchasing a car before you make that final decision to buy. A call to your insurance agent should give you a good idea of what it will cost to insure the make and model you’re considering. Be sure to ask if adding an anti-theft system or anti-lock brakes would reduce the premiums. Then ask if you could save more with a comparable model.
Driving Off the Lot
Before you leave the dealership, you still have to sign papers and take possession of the vehicle. Be sure to read and understand everything you sign. Verify calculations and question anything that doesn’t make sense to you.
When you finally get your car, go over everything again. Ask to meet the service manager and schedule a three-month maintenance check. This is where you cash in on the dealer’s much-advertised customer service. Make sure to get what you paid for.
Your car’s value decreases the minute you drive it off the lot. Taking care of it, with regular maintenance and cautious driving, is the best way to extend the value of your purchase and prevent the purchase of another vehicle for a few more years.
Bankruptcy
Bankruptcy is a financial tool of last resort. While it may seem like an attractive way to eliminate debt, stop the harassing collection calls, and financially “start over”, declaring bankruptcy will have an impact on your life for years. It’s important to understand how bankruptcy works and what declaring bankruptcy means for your future.
Chapter 7 Bankruptcy
If you can’t pay your bills now and are not likely to earn enough income to pay them in the near future, you may be eligible for Chapter 7 bankruptcy. The laws vary in each state, but Chapter 7 usually discharges most unsecured debts, such as credit card debt and medical bills. You will still have to pay back secured debt, like the mortgage on your home or the loan on a car, if a judge decides they are exempt. Chapter 7 also does not eliminate government student loans, taxes, alimony, child support, or any debts that are the result of fraud. Other than your home and car, any personal property of value will be sold by a court-appointed trustee in order to pay your creditors as much as possible.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is available for people who are still earning income, but can’t meet their monthly debt obligations. You can’t have more than $250,000 in unsecured debt or $750,000 in secured debt to qualify for Chapter 13. The court will appoint a trustee to sort through your finances and come up with a three to five year repayment plan. Your debts aren’t forgiven, but you won’t have to sell any personal property to pay them off. Instead, your creditors agree to accept the monthly payments decided upon by the courts without charging you any additional interest. Don’t expect the court to provide you with a generous monthly allowance, though, the goal is to pay your creditors as much as possible.
How to File for Bankruptcy
Before you decide to file for bankruptcy, you should talk to an attorney, so you fully understand the process and the implications it will have on your finances. If you choose to declare bankruptcy, you’ll have to fill out legal paperwork and file it with a bankruptcy court. You’ll also owe a filing fee, an administrative fee, and your attorney’s fee. Remember, you can only declare Chapter 7 bankruptcy once every six years, so you can’t just go back to old spending habits afterward.
Life After Bankruptcy
Most people only think about the freedom they’ll feel once bankruptcy takes care of their debt. But bankruptcy follows you for the rest of your life. It stays on your credit report for up to 10 years, and can make it difficult for you to re-establish credit. Even after 10 years you may have trouble qualifying for a mortgage or car loan. You’ll have to check “yes” on every application that asks if you’ve ever declared bankruptcy, and you could be turned down for an apartment or a job as a result.
Bankruptcy provides a way out for people who cannot afford to pay off their debts, but it isn’t an end unto itself. Before you decide to declare bankruptcy, you should explore every other possible avenue for taking control of your financial situation.
Money Management
Save Money or Repay Debt?
So you have a little extra cash on hand at the end of the month—should you use it to pay down credit card debt, or add it to your savings account? The answer depends on a lot of factors unique to your personal financial situation. To make the right choice about what to do with extra money, take these following questions into consideration:
Do you have enough money set aside in case of emergency? Most financial experts recommend that you keep an “emergency fund” large enough to cover three to six months of living expenses. Your emergency fund should be kept in a savings or a money market account that you can access without penalty, but won’t be tempted to touch unless you absolutely need the money.
What’s the interest rate? Get out your statements from savings and investment accounts, as well as your credit card bills. What are the interest rates? Interest rates have plummeted over the past several years, so that many savings accounts and money market accounts are earning next to nothing. On the other hand, you may be paying interest on credit card debt as high as 20 percent. You should pay down debt with extra money, unless you can find an investment vehicle that offers a higher interest rate.
- Savings: If you put $100 in a savings account earning 1 percent interest, you’ll have $101 in a year. But you’ll owe taxes on that extra $1, so your real rate of return is actually less.
- Debt Reduction: If you pay off $100 of debt on a credit card that charges 18 percent interest, you’ll save $18 and owe $100 less.
Why not do a little of both? If you’re not sure whether to pay off debt or add to savings, why not do both? Use half your extra money to pay down the debt with the highest interest rate, and invest the other half. When it comes to your money, it doesn’t have to be all or nothing.