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How to – Understanding the stock market
By plrprousers | November 4, 2009
Question 1: “Why should I invest?” The underlying answer that most of us have to that question, even if we don’t say it, “That’s too risky. I don’t want to lose everything by doing that. I’m not that dumb, I’ll just save in a savings account.”
So the first answer to calming yourself is to ask yourself: “Do I know what the Rule Of 72 is?” and “How does it affect me, anyway?”
What Is The Rule Of 72?
This Rule dates back hundreds of years. It (The Rule Of 72) was referenced by Luca Pacioli, an Italian mathematician, sometime during the 15th century as a convenient way to determine how long it takes your money to double, assuming you know the interest rate it earns. {Luca didn’t explain the rule much, meaning it almost certainly goes back even further than that, but the principle still holds true today}.
{Here’s an example: start with any amount of money, let’s say 0.00 to be simple. You invest it at 10%. Using the simplest of math, you take 72 and divide it by 10, and you get the number 7.2, which means your money will double to 0.00 in 7.2 years}.
{If you have 0.00 and you invest in at 7.2%, you take 72 and divide it by 7.2, and you get the number 10, which means your money will double to 0.00 in 10 years.
The same exact principle is true if you start with 0.00 or 0,000.00. That’s all the harder it is}.
Now, is it accurate? So, this is not exactly precise. One benefit of The Rule Of 72 is that you can assume it will compound yearly In all actuality it could compound monthly or even daily. The general idea is this for a very accurate answer you should use a financial calculator found on www.uscertifiedfinancialplanner.com.
How Does It Affect Me, Anyway?
Let’s assume you really are thinking like our hypothetical person at the start of this article, and you already know it is better than to get into the NYSE, so you just dump some money every month into a savings account. Is it enough that you save doesn’t that make you feel comfortable knowing that some don’t save at all?
Let’s see.
So you’re in a savings account which, in today’s market, probably pays you something like 0.2% if you’re like most people and maybe 3%, if you’ve got a lot of assets and your mortgage there, too. If you are part of the second group and you are earning 3%, you would take 72 divided by 3, you would get….ouch, 24 years for your money to double.
If you’re in the former group and earning 0.2% yeah this would be great if you are looking to double your money in 3,600 years! Easy enough?
Are you retired and only buying 3% CD’s? If inflation is zero and you don’t withdraw ANYTHING your money will double in 24 years. Inflation for the last 200 years in the USA has averaged 3%, currently it is nowhere close to that. That means a 3% return is roughly equal to no return at all, most of the time.
What does this have to do with educating yourself about the stock market? Your involvement IS the answer to the first question. Your involvement is good, working with a financial planner better, cut down on the time you have to work to maximize the time you are able to spend with your family.
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