Deeper Dive in The Rule of 72 Part III

In the first two parts of the deeper dive the positive side of the rule was explored. Now I’m going to do a quick look at the dark side of the rule of 72…

The rule of 72 works against you and for your lender when you borrow money. Looking at bank savings rates and bank lending rates it is not hard to figure out why there are more banks are being built every day. The gap between the two is the bank’s profit. This is a short article because the concept is simple.

Here is the difference of the average savings interest rate (1%) Vs average credit card interest rate (15%)

The credit card company doubles it’s money on you in about 5 years while it takes you 73 years to do the same. Using a credit card and not paying it off as soon as possible weakens your future earnings in two ways. You lose money paying interest to the bank and you lose money not made on investments you can’t make.

Like the dark side of the moon the money spent on interest is a black hole. $5,551 is the average credit card debt in 2015; this becomes $11,102 by 2021 for the credit card company.  The same $5,551 can be spent on debt or investments so below is the difference between the average credit card debt and the average S&P 500 Index Mutual Fund.

The difference is $66,612 in a 14.4 year period. That is more than the median household income for one year. ($55,775) It is more than double the average individual annual income ( $32,140) 

How can one get ahead when one out of every 14 years you work for the credit card company?

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