My lucky number is ... 72?

The Rule of 72 can provide students with a nice chunk of change in the future

 by Lauren Cusimano
 published on Wednesday, March 26, 2008

STATE PRESS MAGAZINE

The common financial situation for college students usually calls for eating macaroni and cheese every night, but there is a way students can look forward to a more financially secure future.

Albert Einstein's rule of 72 is a formula displaying how 20-year-olds can become millionaires by retirement if they start saving today. It shows how long it will take for someone's savings to double by dividing 72 by the interest rate being earned.

This rule is targeted specifically for participants in their early 20s, and even teenagers. The advantage for young people is if they start saving early, they can comfortably put away as little as 10 percent of their income.

The strategy is to give as much time as possible for one's savings to collect interest.

"I use the Rule of 72 as an example in both my FIN 300 and FIN 380 classes when we are discussing the concept of time value of money," personal finance professor David Hoffman says in an e-mail.

"Using financial tables or formulas, you can prove mathematically that the rule works," Hoffman says. "In other words, it is a good approximation for the concept of future value or compound value."

Finance professor Lawrence Licon says the Rule of 72 is pretty simple. "Let's just say your interest rate is 9 percent," he begins.

Licon says if one were to divide 72 by the number nine, it equals eight. "What that says is, given a 9 percent interest rate, roughly, it's going to take you about eight years to double your money."

Licon says it is only an approximation, but the longer amount of time given, the more money can be put away, which is important for young people.

"The rule is nice because it gives people nice ballpark numbers to see what's actually going on," Licon says.

Basically, the name of the game is to start saving as soon as possible.

"If you just contribute a little more money, a little bit earlier, you are essentially guaranteed to be a millionaire," Licon says.

However, putting away money at a young age may seem impossible for many, either because of current financial struggles or the enticement to do something else with the extra change.

"The temptation [for recent college graduates] is this: 'I got a new job, I want to go out and buy that shiny new car.' It's like they're begging to go out and spend $600 a month on car payments" Licon says. "If you can just hold off with your current car for a little while, start putting that $600 a month into an account ... life gets a lot easier pretty quickly."

Licon says by following this procedure, "all of a sudden you're 63 years old and you've got a healthy chunk of money sitting there waiting for you."

Licon says he never came across the Rule of 72 during any of his college finance classes as a graduate or undergraduate student, nor is it relevant to teach in any of his classes. Therefore, students would have to find this rule on their own.

College students might have no idea they are in their prime for putting away money. One would think college students most likely aren't getting involved with savings and thoughts of retirement.

Family studies senior Leah Yanachek says she thinks students are more worried about the present than the future.

"I think ASU students are more worried about finding jobs after graduation than what kind of 401K they should have for retirement," she says.

English junior Lynda Farrell says she has a savings account but that her knowledge ends there.

"I don't really know anything about [interest rates]," Farrell says. "Hearing about how worried everyone is about the economy now, though, I'm getting a little concerned."

Political science junior Elizabeth Holleran says she is becoming increasingly concerned with not having Social Security for retirement. Because of this issue, she says having a savings account is important.

"Being in college makes it difficult to save money, but it will be beneficial later in life," she says.

Licon says the easiest path for young people looking to start saving lies within IRAs and mutual funds.

"As long as it isn't your next month's rent, invest in mutual funds," he says.

— lauren.cusimano@yahoo.com