Personal Note: In this very helpful and instructive article, Zigfred places emphasis on the importance of compound interest in achieving our personal finance goals. With high level of discipline, soberness of mind, and continuous learning, the “Rule of 72” simply becomes a very powerful tool in creating an enviable and a sustainable financial lifestyle.
By [http://ezinearticles.com/?expert=Zigfred_Diaz]Zigfred Diaz
The Rule of 72 is simply a label given to the principle of compounding interest. It includes a very simple mathematical formula that explains how money grows. Compounding is very simply, earning interest on your money and then re-investing that interest. The Rule of 72 illustrates very clearly how it is done.
The Rule of 72 can teach us a couple of important lessons. Here are some of them:
1.) Money is like a fruit tree - When you plant a tree, you don't expect it to bear fruit overnight. Neither does your money. You give it time to grow just like a tree. The Rule of 72 teaches that if you give more time to your money to "compound", you can expect bigger returns. There will be more illustrations in my next post.
2.) Interest rate is the key - The Rule of 72 teaches that the higher the interest rate, the faster your money will double, and the faster it does, the more money you earn. Especially if you keep your money invested for a long period of time.
3.) Money does not grow on trees - This saying simply means you cannot make money without working for it. Nothing ever comes in life free - definitely not money. The Rule of 72 teaches that to get more money out of what cash we have, we need to exert all effort to get the highest interest rate possible while ensuring that we do not carelessly engage in risky transactions or business deals that seem too good to be true.
4.) Make money work hard for you - Why should we work hard for money when we can make money work hard for us? That is right. The best way to financial freedom is to let money work hard for us. Money is very much different from human beings. It doesn't get sick, get tired or complain. The Rule of 72, which is all about the concept of compounding interest, teaches us that interest when re-invested begets more interest.
5.) The concept of the "Automatic Money Machine" - The Rule of 72 fully supports a powerful concept in personal finance called Passive income. Personal finance experts talk of two kinds of income: active income and passive income. An example of active income is your day job where you have to be physically present and doing some work for your boss in order to earn your salary. Passive income is an "automatic money machine" where you don't have to do anything to earn an income. You just sit there and watch money come in. However, passive income does not start automatically. You need to do something at first, after which you will start to reap the benefits and just wait for money to come in. Interest income is a good example of passive income - your money earns interest without your doing anything to earn that interest. The Rule of 72 demonstrates what passive income is.
So those are the valuable and powerful lessons in the areas of investing, business and personal finances coming from the Rule of 72. These are the reasons why I call the rule as the foundation for all investing.
Zigfred Diaz is a businessman and a stock market investor. He regularly blogs about personal finance and how to invest in the stock market. Click on the following links, if you would like to know more about the [http://www.stockmarket-investing.com/the-foundation-of-all-investing-the-rule-of-72/]Rule of 72 or how to do [http://www.stockmarket-investing.com/]stock market investing intelligently.
Article Source: [http://EzineArticles.com/?What-We-Can-Learn-From-the-Rule-of-72&id=4550752] What We Can Learn From the Rule of 72
