'Rule of 72' a useful tool for quick calculations

The Ticker

October 06, 1995|By JULIUS WESTHEIMER

WHEN PEOPLE ASK, half-jokingly, "How can I double my money?" I explain the "Rule of 72."

Simply stated, when you divide your compound interest (or growth) rate into 72, the result is the number of years in which money doubles.

At 7.2 percent, for example, money doubles in 10 years. At 10 percent, only 7.2 years. At 8 percent, 9 years. At 6 percent, 12 years, and so on.

MAKING IT WORK: In that context Forbes, Oct. 9, says, "The Rule of 72 proves the power of compound interest.

"Money manager Shelby Davis states, 'If you buy stocks showing 10 percent annual earnings growth, under 10 times earnings, and profits double in seven years, you're nearly guaranteed your stocks will double.' "

HOPEFULLY HELPFUL: Did you know banks "bend" rules for good customers?

Banks can charge loan interest below the going rate, waive fees for checking accounts, give free travelers and cashier's checks and reduce minimum balance requirements. Some banks even phone if you're nearing your "bounced check" level.

To get favored treatment, show loyalty: Bank all at one place -- checking, savings, safe deposit boxes, loans, etc. Establish a personal relationship with bank people. Bring in business. Because banks want to keep you, often they'll do favors if you ask.

STEAKS & STOCKS: An old menu shows that in 1962 a steak at New York's Four Seasons cost $7.50, today $39, up 420 percent. Back then a Broadway show averaged $6, now $45, up 650 percent. And a New York-Washington train ticket cost $9.68, today $51, up 426 percent.

But in mid-1962 the Dow Jones industrial average stood around 540, so at today's level it's up almost 800 percent, a good inflation hedge.

MONEY-SAVER: Money magazine, Oct., runs a good story, "With Billing Errors Rampant, Don't Overpay for Medical Care." Highlights:

"Keep a daily log of procedures, medicines, doctor visits. If you can't, ask a friend to help Demand an itemized bill, not just a summary, including lab tests, drugs, supplies, equipment, etc.

"When you get your bill, compare it with your written record. If the bill puzzles you, ask a billing supervisor to help."

DID YOU REALIZE that dinner and movies four times a month at $75 a pop costs a couple $3,600 a year? But that if you go twice a month, your annual $1,800 saving grows to $169,500 over 25 years in a 401(k) plan at 9 percent compounded? (And 9 percent is less than the 50-year average annual 10.2 growth rate for the S&P 500 index.)

HOT OFF PRESS: Rockville-based Mid-Atlantic Medical is listed No. 4 under "America's Best 100 Growth Companies," in the latest Financial World, Oct. 10.

For a free copy of "Should You Refinance Your Mortgage Now?" phone Harry B. Gorfine Co., 539-5474.

WALL ST. WATCH: Tonight, "Wall Street Week With Louis Rukeyser" focuses on "Emerging Markets and Their Stocks."

"An employee who starts investing $200 a month at age 25 in a 401(k) plan at only 6 percent would have $398,000 by age 65." (CNN News.)

"The U.S. stock market is up 75 percent since 1990. Japan's market has plunged by 50 percent." (Business Week, Oct. 9.)

"The federal budget is a mess. Any kind of 1995 tax cut now appears highly unlikely." (Jerome Levy Economic Institute Forecast.)

"The whole country can be unlucky, and stocks will still do better than bonds over 20 years." (Peter Lynch, ex-manager, Fidelity Magellan Fund.)

"The stock market is that creation of man that humbles him the most." (1995 Stock Trader's Almanac.)

"For sound financial planning, expect to live longer than you think. Average retirees today should count on 25 more years." ("Escaping The Coming Retirement Crisis," by Theodore Benna, $24.)

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