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Unit 4 - Finance

Unit 4 - Finance. Needs versus wants. Needs are the essentials of everyday life that you cannot live without Wants are items, activities or services that increase the quality of life. Can be wasteful if your income is limited. Needs vs. Wants. Needs examples. Wants examples.

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Unit 4 - Finance

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  1. Unit 4 - Finance

  2. Needs versus wants • Needs are the essentials of everyday life that you cannot live without • Wants are items, activities or services that increase the quality of life. Can be wasteful if your income is limited

  3. Needs vs. Wants • Needs examples • Wants examples

  4. What do YOU do with your money? • Jot down the last 10 things (items, activities or services) you bought. • Categorize each as a need or want.

  5. Master expense list-$30,000 exercise (from Power Play-fixed vs. variable)

  6. What’s the moral of the story? • Buy only things you really want, set limits. • Buy things on sale. • Pay yourself first. Usually 10% of net income. • $10.25 per hour is less than $19,700 per year so training and education is key. • Set goals and follow a BUDGET!

  7. But wait..its not a budget? • People have a hard time with budgeting because it has restrictive connotation to it. • A budget shows you exactly where money goes while a spending plan lets you save for things that are important to you (car, house, etc). • Should be customized to meet your needs, the simpler the better! • The basics of creating a budget: choose a budgeting period, calculate expenses, balance expenses and income..that easy! • Recognize the difference between fixed and variable expenses. Fixed expenses are expenses that don’t change month after month (e.g. rent) while variable expenses can change from month to month (e.g. entertainment, food). • If your budgeting isn’t working, ask yourself what money means to you: is it a self esteem booster? To make yourself seem worth while? Do you get a rush out of making a new purchase?

  8. How budgeting can improve your life • Sets guidelines for reaching financial goals. • We expect our government to have a budget: why shouldn’t we. • Lets you control your money instead of your money controlling you. • Lets you know if you are living within your needs. • Lets you meet saving and investment goals. • Frees up spare cash so you can spend it on things you really want instead of things you don’t even remember buying.

  9. How budgeting can improve your life • Helps families focus on common goals. • Helps you prep for emergencies and other unanticipated expenses. • Strengthens marriages as it is a communication tool. • Reveals excessive spending areas. Creates a visual spending picture. • Can help get you out of debt or keep you out of debt. • Can help you sleep better at night because you don’t worry about how to make ends meet.

  10. Personal vs. Financial goals Personal: ______________ Financial: _____________ What I can be doing now to work towards this goal? The resources I need to achieve this goal are Personal? External? • What I can be doing now to work towards this goal? • The resources I need to achieve this goal are Personal? External?

  11. Where does your money come from? Determining anticipated income. • Answer these questions in full sentences, be prepared to discuss your answers in class. • List your current source(s) of income. _________________________________________________________________________________________________________________________________________________________________________________ • What do you expect your source(s) of income to be in the near future? _________________________________________________________________________________________________________________________________________________________________________________ • What are your feelings about being financially dependant vs. financially independent? _________________________________________________________________________________________________________________________________________________________________________________

  12. Where does your money go? • Think back to everything you bought during the last week and answer the following questions. What patterns can you see in your spending habits? ____________________________________________________________________________________________________________________________________________________________________________________ How do you decide what to purchase? ____________________________________________________________________________________________________________________________________________________________________________________ What factors do you think influence your purchasing decisions? ____________________________________________________________________________________________________________________________________________________________________________________

  13. Steps to setting up and maintaining a budget Estimate your income Estimate your expenses to include: • Fixed regular monthly expenses. • Fixed “irregular” monthly expenses. • Flexible monthly expenses. • Personal expenses. Estimate your future expenses: • Begin by keeping a record of everything you spend. • What are your financial goals and your plans for obtaining those goals? Cope with change. • Plan for change. • Plan for changing conditions that increase or decrease your expenses. Keep your personal and financial goals in mind. • Set money aside to meet financial goals. Balance your budget • Each month, compare your income to your expenses. Continue reworking your budget until your income is greater than your expenses. • Discuss different budget options available. Practice setting up a personal budget.

  14. Assignment: Create your own personal budget This is an individual assignment in which you will create your own detailed budget. The budget will not be a reflection of the funds you have now. Your budget will be based on one of the two occupations you chose in your Career Cruising assignment in which you hope to be working ten years from now. This is a required component of your GT package. It will be marked using the following criteria: 1. Title page and table of contents. …………………………………………………………/10 - Name, block, course, date, teacher, title - Bright and colorful, table of contents includes topics and page #’s 2. Employment description/salary…………………………………………………………../10 - Type of job, description, location, daily hours - Daily, monthly and yearly salary. 3. Occupational Income Sheet………………………………………………………………./10 - Accurate completion of Occupational Income Sheet. 4. Shelter/accommodation………………………………………………………………….../10 - Location and reasons for selection. - Include the advertisement. - Rent, hydro, telephone, cable, insurance, internet, other.. 5. Food costs (optional)..……………………………………………………………………./10 - detailed daily menu (7 days a week, 3 meals per day). - grocery list complete and accurate. DUE DATE: __________________________________________

  15. Assignment: Personal Budget-Job Description Details Job Description Details. • Describe the job in pain staking detail (300 of your own words minimum). • Find a location to work and provide all the details (e.g. address, etc.) • Yearly salary before taxes. • Monthly salary before taxes. • Daily salary before taxes (based on 22 working days per month) • Hourly salary before taxes. This section will be approximately 1 ½ pages in length, typed, single space, 12 size font. Use Career Cruising as your primary source.

  16. Assignment: Personal Budget- Occupational Income Sheet • My occupation is _________________ • I need __ year(s) of post secondary training for this career. I got this information from: _______________________________ (One year of university costs approx. $6500-7000. One year of college $6,500-7000. $8500 per year for a Masters program. $17,000 for a doctorate program. Trades vary-use the training institute’s approximation.) • Number of years __ X above amount = _____________. • What is your anticipated first year’s income? ___________ • What is your pay now (10 years after you graduate high school)? ______________ TAX RATES: $0- 30,000 (27%), 30,001-59,999 (35%) 60,000 and over (40%). • GROSS PAY for one year is _______ X the TAX RATE as a decimal. This equals your yearly taxes which is ___________. • GROSS PAY for one year ________ minus taxes equals NET PAY for one year which is _____________. • Take NET PAY __________ divided by 12 months equals NET PAY per month ___________.

  17. What do students know about saving? Canadian survey results. Two-thirds of students say it is very/somewhat important to be aware of how to manage money Only 15% of students believe managing money is unimportant or not very important. Almost 2/3 of respondents found it to be an important topic. Budgeting behavior appears to change as students progress through school As students go through high school, their behavior towards budgeting appears to change. By grade 12 fewest proportion do not budget their money (25% in grade 12 do not budget vs. 42% in grade 10). Slight increase in per cent who claim to always budget in grade 12 vs. those in junior grades. Males and females have very similar budgeting habits. Less than half of students have been shown how to create a budget Over half of the respondents have never been shown how to create a budget (57%) 68% of those in grade 10 have not been shown how to budget vs. 50% of those in grade 12.

  18. What do students know about saving? Canadian survey results. Savings accounts and Debit cards are the top financial products that students use and are familiar with 16% of all students indicate having access to a credit card When asked about credit card repayment, over half of credit card holders indicate they pay off the entire amount each month (57%). Grade 12s are 28% less likely to pay off the entire amount each month than grade 10s. Grade 12s are also less likely to have “someone else pay” their monthly bill. Students earn money from PT jobs or allowance and think of “savings” when asked about finances. More than double those in grade 12 have earned money from part time work than those in grade 10. 73% grade 12s have earned money from a PT job vs. 28% in grade 10. “Saving” is one of the top responses when asked for top of mind comments about “personal finances and managing money”.

  19. What do students know about saving? Canadian survey results. Clothes are the top item to save for while school-related costs lead as biggest concern. The top items that all students save for are “clothes” and “entertainment” (66% and 55%) There is difference between the grades for the top third spot. Grade 10s save for “gifts for others”, grade 10s and 11s save for “technology” and grade 12s save for “education”. For all high school students “paying off tuition and school expenses” is the number one financial concern (30%) Those in grade 10 are slightly more concerned about “buying or paying for a car or house”(12%) than “having enough money to do what I want” (10%) Two-thirds of students say it is very/somewhat important to be aware of how to manage money Only 15% of students believe managing money is unimportant or not very important Almost 2/3 of respondents found it to be an important topic.

  20. What do students know about saving? Canadian survey results. Buying a car is the number one area students have most interest in learning more about Knowledge Interest Gap Buying a car 24% 62% 38% Investing money safely 21% 50% 29% Saving money to move out from home 21% 50% 29% Saving for education 37% 62% 25% Buying a home 14% 39% 25% Most students do not indicate that they feel prepared to manage their money after graduation About 7% of students feel very prepared while 31% of students feel that they have some level preparedness and 35% of students clearly indicated that they do not feel prepared to manage their money. Self perceptions of being prepared to manage money gain strength with increase in grade level. Students indicate schools should provide some information on money management and rate their schools today as weak in this regard.

  21. Thinking about the survey. • What statistics could you relate to? __________________________________________________________________________________________________________________________________________________________________ • What statistics stuck out as odd to you? __________________________________________________________________________________________________________________________________________________________________ • How do you feel your thinking about finances will change as you approach Grade 12/post secondary? __________________________________________________________________________________________________________________________________________________________________

  22. What are financial institutions? In Canada, you can use, banks, credit unions and trust companies for banking services. Each of them provides a range of services and fees vary from one to another. They run as a business to make profits for their owners and make money by taking in deposits and then using that money to lend to other customers or to invest in other profit-making activities. They pay interest to depositors for the right to use their money Level of service, fees and interest rates paid to depositors vary because financial institutions vary in their scope of operations; some have more customers and are able to leverage better deals for their customers, some have more efficient business practices or even less services. Some can even pay more interest usually at the cost of limiting depositor withdrawals. Depositor insurance is insurance that covers depositors in the event of a financial institution going bankrupt. Most financial institutions are members of the Canada Deposit Insurance Corporation (CDIC) and are covered for deposits in accounts of up to $60,000 CDN but investment accounts are not covered. Credit Unions are covered up to $100,000 per depositor. The CDIC hasn’t had to pay a claim since 1996 which demonstrates that most Canadian financial institutions unlike their American counterparts are based on solid business models first and foremost. Challenge: Can you name the 4 largest Canadian financial institutions in 2014? 1. ____________ 2. _____________ 3. _____________ 4. ______________

  23. Guide to banking services

  24. Guide to banking services (con’t)

  25. Guide to banking services (con’t)

  26. Guide to banking services (con’t)

  27. Bank Brochure Assignment As the new bank president, you have been tasked with coming up with a visually appealing, informative and easy-to-read brochure that outlines what services your bank provides and why becoming a customer of the bank is a good idea. Your brochure should include the following elements: 1. Name of the bank. 2. What type of services your bank provides (no less than 8 services: services can include items such as: chequing/savings accounts; consumer loans; line of credits; safety deposit boxes, etc). A detailed explanation of each service and its corresponding fee (if any) is required in your brochure. Using online banking sources would be a good idea here. 3. Selling points of your bank. (e.g. “ We have the lowest interest rates on car loans” or “We give a free monthly bus pass to all new student customers”). 4. Creativity, originality and neatness. How visually attractive is your brochure? Originality and neatness count for a lot and the brochure must be appealing and have a certain “wow” factor attached to it. This assignment will be marked out of 30 (10 for each of criteria areas 2-4) and your mark will depend on how closely your project meets the defined criteria set forth. DUE DATE: ________________________

  28. What is credit? 1) Allows you to buy the things you need and want today while deferring or extending the payment into the future. 2) It can help you purchase certain things that would take far too long to save for. e.g. house or car NOTE: Credit can be a useful tool in your financial planning. Unfortunately it can also result in financial disaster. Knowing HOW to use credit is key.

  29. Types of CreditTypes of Credit Consumer loan: (e.g. Purchasing a TV from Best Buy) Term loan (through a bank—must have dollar-for-dollar collateral) Trust companies Credit unions (like banks but owned by customers) Life Insurance companies Outside mortgage providers (high rates) Parents (a.k.a. the bank of mom and dad)

  30. Things to consider before using credit (i.e. borrowing) 1) Do you really need or want the item? 2) Is the “sale” item better than the “interest” charges you might pay! Can you pay for the sale item quickly –before the grace period ends? 3) Will the cost of buying now cut into the “interest” in your “savings” account! 4) Will the price of your PURCHASE increase too much in the time period!

  31. Using Credit Wisely (handout questions) • List 3 strategies for using credit wisely listed in the handout. ____________________________________________________________________________________________________________________________________________________________________________________ • List 3 signs you could have a debt problem. ____________________________________________________________________________________________________________________________________________________________________________________ • List 3 possible solutions to a debt problem. ____________________________________________________________________________________________________________________________________________________________________________________ • What are some of the drawbacks of claiming personal bankruptcy? ________________________________________________________________________________________________________________________

  32. Getting control of Debt (handout questions) 1) List 3 danger signals that you may have a debt problem. ________________________________________________________________________________________________________________ 2) What is the absolute best thing you can do if you have a financial problem? ________________________________________________________________________________________________________________ 3) What is the most important thing to look for when shopping for a debt consolidation loan?) ________________________________________________________________________________________________________________ 4) What is a Consumer Proposal? ________________________________________________________________________________________________________________

  33. Handout questions Complete Credit and Debt review questions. Complete Credit and Debt review quiz.

  34. Taxes in Canada Basic information • Tax is a compulsory payment • Purpose is to raise revenue for government • Collected at a federal, provincial and municipal level. List a type of tax collected by each level of government. Federal ______________ Provincial _______________ Municipal _______________ Good tax: • Its fair • Its easy to figure out • Its easy to collect • Its direct and not shifted to someone else (opposite: indirect or hidden)

  35. Kinds of taxes Income tax • Types include personal and corporate • Collected by Revenue Canada • Canada Pension, Employment Insurance (EI), etc. Sales tax • Federal and provincial used to be separate (PST-5% and GST-7%=12% total) but since July 2010, BC has seen the introduction of the 12% HST (Harmonized Sales Tax which is collected by the federal government. HST applies to more items than the tax it replaced. (e.g. haircuts, sports/theatre tickets, some grocery items). Excise tax and excise duty (federal) • Luxury tax on vehicles over $40,000 (e.g. cars) • Excise duty (alcohol and tobacco) Customs duty • On imported goods (e.g. something you purchase abroad off eBay) Property tax • Levied on real property by municipal governments Business tax (municipal-enforced by bylaws) • Business license • Dog license

  36. Legal requirements for reporting personal income tax Complete the following questions after reading the booklet: Students and Income Tax. 1. As a student, what is probably the most important reason you would want to file an income tax return? ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 2. What is a SIN and why does the federal government need it? __________________________________________________________________________________________________________________________________________________________________ 3. If you don’t feel comfortable filing income tax and would prefer to have someone else (e.g. a parent or accountant) represent you, what are two steps you can take? ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 4. What are the four ways in which you can file your return? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  37. Legal requirements for reporting personal income tax (con’t) 5. What is the date that your return is due? ____________________________________________________________________________________________________________________________________________________________ 6. What do you include with your return and what records do you keep? ____________________________________________________________________________________________________________________________________________________________ 7. How long should you keep your supporting documents for? ______________________________________________________________________________ 8. What tax package should you use? ____________________________________________________________________________________________________________________________________________________________ 9. What do you do if you are missing information like a T4 slip? ____________________________________________________________________________________________________________________________________________________________ 10. What are types of income you don’t have to report? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  38. Legal requirements for reporting personal income tax (con’t) 11. What is the most common deductible expense for students and how does it work? ____________________________________________________________________________________________________________________________________________________________________________________________________________ 12. How will the scholarship exemption be treated after 2010? ____________________________________________________________________________________________________________________________________________________________________________________________________________ 13. What are federal non refundable tax credits? What are examples of some? ____________________________________________________________________________________________________________________________________________________________________________________________________________ 14. Describe the Public Transit amount. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  39. Legal requirements for reporting personal income tax (con’t) 15. Why do you think the federal government makes interest on student loans a non-refundable tax credit? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 16. List four institutions from which you can claim tuition fees. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 17. List eight eligible tuition fees. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  40. Shopping for credit cards Student credit cards differ substantially and you must comparison shop for the one that is right for you-here are some questions to ask yourself: • How do I plan to use the card? (carry a balance or pay the balance monthly) • What is the annual fee? • What are other associated fees? • What is the grace period? • What is the balance computation method used? Important terms to know when credit card shopping: Grace period: time following the purchase in which interest is not charged. APR: Annual Percentage Rate on a credit card. It is the amount you will pay in interest charges per year. In its most simplistic form, you can figure out how much you pay per day, take the APR divided by 365. Balance computation method: The method by which your interest charges are computed . There are four methods.

  41. Balance computation method Examples of balance computation methods include the following: • Average Daily Balance. This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance.“ • Adjusted Balance. This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren't included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance.

  42. Balance computation method (con’t) • Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges. • Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two month's account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used. If you don't understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.

  43. How does APR affect my credit card bill? If you do not pay your credit card bill in full each month, the APR can greatly affect how much money you give your credit card company for the short-term use of their money. • For example, say you have $1,000 charged on a credit card with minimum monthly payments of only $20. Sounds nice, right? You may think you can afford that payment each month, with little effect on your pocketbook. But let's look closer and figure out what it really costs to pay only the monthly minimum. • With a 15% APR, and making only the minimum payments, it would take over 6 years to pay off your charges, and with an additional hit of $546.18 in interest over those years going to the company. Your $1,000 charge just turned into over $1,500! • If you have bad credit or frequently do not pay your bills on time, you may have a higher annual percentage rate, say 21%. At 21% interest, that initial bill will take you over 9 years to pay. You would pay in over $1,200 in interest for that $1,000 purchase. This does not include any annual credit card fees, late charges, or over limit fees that may be charged against your account during that time, and remember, those extra fees will also accrue interest charges! • However, if you have a good credit history and shop around for a low-interest rate card, you may have an APR of only 7%. At this rate, it will only take just under five years to pay that bill, with only an extra $177.55 in interest charges coming out of your pocket. Of course, the three scenarios above do not take into consideration that you are probably putting additional purchases onto your card at the same time. Therefore, the amount paid to the APR will increase, as will the amount of time it takes to pay the card off. A high interest card that is not paid off quickly can result in a lot of consumer debt. This is why it (literally) pays to shop around for the best deal, and to keep your credit history clean.

  44. Student credit cards: some suggestions • Shop for student credit card terms that are best for you. • Make sure you understand the terms of a card plan before you accept the card. Review the terms and fees that must appear on credit-card offers you receive in the mail. • Pay bills promptly to keep finance charges as low as possible. • Keep copies of merchandise sales slips and promptly compare charges when your bills arrive.  Do your accounting and keep a history of your accounting. • Protect your credit cards and account numbers to prevent unauthorized use. Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbon copies. • Keep a list of your credit card numbers and the telephone numbers of each card issuer in your phone and in a safe place in case your cards are lost or stolen. Remember that there is a difference between a debit card and a credit card.  The debit card pulls the money from your chequing account at the time of transaction when you buy your merchandise.  The credit card bills you at the end of the month.  Remember to keep a history of your accounting and book-keeping.  Good records are your best defense to any disputes that you might have with a credit card company.

  45. Student credit card shopping list • Make a list of features that best fit your needs, and rank them according to how you plan to use the card. • If you are currently a cardholder and have a good credit rating, ask the issuer of your card to lower your current rate or to reduce or waive your annual fee. Negotiate. Review the following information about the plans: • Availability - Is the card accepted internationally or nationally? • Interest rate pricing - Is the interest rate fixed, variable or tiered? If the rate is variable, what is the index? The margin? The multiple? • APR - What is the APR for purchases, cash advances, balance transfers, etc? Is there a late payment penalty rate? • Finance charge - What balance computation method is used to calculate the finance charge? • Annual fee - What is the annual fee? • Grace period - What is the grace period for purchases? • Other features - Does the plan offer enhancements that are attractive to you, such as cash rebates, purchase protections, warranties or guarantees, travel accident or automobile rental insurance, discounts on goods and services purchased, and incentives for use, such as frequent flyer miles? Are these features available at no extra cost.

  46. Investing 101 – Why invest? • Investing as a student is a wonderful time of life in which to get started in building your financial portfolio. Investing even just a little bit of money in your late teens and early twenties can grow to thousands of dollars in your middle age. When you begin investing as a student, you have time on your side. Here’s what you need to know before starting your portfolio.

  47. Investing 101 – Simple interest Simple Interest • Simple interest is calculated  on  the original principalonly.  Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days. • Simple Interest = p * i * n • where:    p = principal (original amount borrowed or loaned)    i = interest rate for one period    n = number of periods • Example: You borrow $10,000 for 3 years at 5% simple annual interest. • interest = p * i * n = 10,000 * .05 * 3 = 1,500

  48. Investing 101 – Compound interest Compound Interest • Compound interest is calculated each period on the original principal  and all  interestaccumulated during past periods.  Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously. • Think of compound interest as a series of back-to-back simple interest contracts. The interest earned in each period  is added to the principal of the previous period to become the principal for the next period.  For example, you borrow $10,000 for three years at 5% annual interest compounded annually: interest year 1 = p * i * n = 10,000 * .05 * 1 = 500interest year 2 =  (p2 = p1 + i1) * i * n = (10,000 + 500) * .05 * 1 = 525interest year 3 = (p3 = p2 + i2) * i * n = (10,500 + 525) *.05 * 1 = 551.25

  49. Investing 101 – A twin story • A father was so happy that his twin children, T.J. and C.J., graduated that he gave each of them $20,000.  (Some children are more fortunate than others.)  T.J., the brother, had not learned about compounding interest, so he spent $10,000 and kept the remaining $10,000 in his checking account.  He did not want his father to claim he wasted all his money.  Now C.J., the sister, had learned about compounding and she invested her $20,000 in a fund that earned 10% compounded annually.  After five years she had $32,210.  That year the twins talked about investing and she suggested that her brother learn about compounding.  He followed her advice and then invested his $10,000 he had in his checking account in a fund that earned 10% compounded annually. • Ten years after the twins had received their $20,000 they got together to compare their investments.  C.J. had $51,875 and her brother had $16,105.  Getting together again twenty years after they had received their money they again compared their results.  C.J. had $134,500 and T.J. had $41,772.  Thirty years after receiving their money T.J. had $108,347.  He was hoping he might be getting close to what his sister had.  Well when they got together to compare results he found out just how powerful compounding really is, for she had $348,988 !!

  50. Investing 101- Rule of 72 The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double (1.10 x 7.3 = 2).

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