Today’s post is brought to you by the number 72! No really, it is. Because 72 is an awesomely useful number in the world of personal finance. It can be used to figure out when (approximately) your investment in something will double.

It’s super easy. Let’s say you’ve got your money in a stock that grows by 6% each year, on average. Without buying any more of that stock, when will your money double through compounding alone?

Just divide magic number 72 by the interest rate (6%), and BOOM, you’ve got your answer! 72/6 = 12. In 12 years, your investment will double. So if you own $1000 worth of that stock right now, and it grows at 6% per year, it will be worth $2000 in about 12 years.

Of course, the “Rule of 72,” as this is called, doesn’t always work perfectly. You can really start to see it fall apart as you try to use higher interest rates. For example, 100% interest should double every year, but using the rule of 72, you’d get about 9 months. Hmm, that’s not right! But for most realistic percentages, it works out pretty well. (Because you’re not really going to find an investment that returns 100% per year, year after year, anyway. Sorry!)

The Rule of 72 can also be used to do a back-of-napkin calculation regarding inflation. As long as you can remember the Rule of 72, and the fact that inflation averages about 3.5% per year in America, you can figure out when the price of something is likely to double. 72/3.5 = ~20, so in 20 years you’ll be paying twice as much for a gallon of milk!

Play with it, have some fun! And remember, your money will double every x years, not just once. So going back to that $1000 at 6% example, not only will it be $2000 in 12 years, but it will be $4000 12 years after that, and $8000 12 years after that…

The Rule of 72 doesn’t allow for an easy calculation of it, but now imagine how your money would grow if you were investing $1000 each year, instead of just once. Ooo… I just got goosebumps!

This is a guest post from Grant Baldwin, the author of Reality Check, a book about helping students transition into the real world. His new website, BrokePiggy.com, answers questions from teenagers about personal finance, savings, and all things money.

This series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” is a community blog experience.  This post is only one of the 12 points in the series so to view the other 11, please visit the list of links below.

Two Words: Compound Interest

We all remember those days of sitting in a math class listening to a teacher talk about theorems, abstract algebra, or differential equations.  And the entire time this lecture was going on, we all asked ourselves the same question:

When am I ever going to need this?

Don’t deny it.  You had the same thought I did.  And a lot of class periods that question popped into our minds except for the day we talked about (wait for it)…

Compound Interest.

Ok, maybe you still didn’t grasp compound interest then, but hopefully you’ve seen the light by now and wished you did grasp it better back then!  When it comes to personal finance, that one simple math concept can be your best friend or your worst enemy.  Here’s one way of looking at it…

Which one of these options would be worth more?

1. Ten thousand dollars per day for 30 days.
2. One penny that doubles every day for 30 days.

Option #1 would be the better choice for the majority of the time until you look at how the race finishes up.  By the end of 30 days, option #1 would be worth $300,000.  Not bad at all.  But by the end of 30 days, option #2 would be worth (drum roll please)…

$5,368,709.12!!!

Pretty wild huh?  So how do you teach this to a student?  Here are some tips…

• Show Them The Numbers — Although most teenagers aren’t “number nerds,” they can still see that $5,368,709.12 is a better option than $300,000.  When students look at the possibilities and you teach them they have an advantage, even over you as the parent, it begins to click for most teenagers.  Time is on their side.

• Help Set Up A Roth IRA — The best investment option for taking advantage of compound interest at a young age is by setting up a Roth IRA.  The only eligibility requirement is that your teen has an earned income.

• The Tortoise Always Wins The Race — Adults aren’t the only ones looking to get rich quick.  Teenagers fall into that category as well.  Part of your role as a parent is to teach them how slow and steady wins the race.  Teach students to not count on striking it rich in the lottery, winning big on Deal or No Deal, or opening their front door to the prize patrol.  The rabbit may seem faster but the consistency of the tortoise wins the race.

Curious about the other 11 things every teenager needs to know about money? Check them out at the following sites:

• Money Doesn’t Grow On Trees @ Bargaineering.com
• Two Words: Compound Interest @ PoorerThanYou.com
• Delay Gratification To Succeed @ GatherLittleByLittle.com
• Living On A Budget Isn’t An Option @ TotalCandor.com
• Credit Cards Will Steal Your Lunch Money @ PTMoney.com
• A Degree Is An Expensive Piece of Paper @ TheDigeratiLife.com
• Spend Money Based On Needs Not Wants @ MoneyNing.com
• There Is More Free Money Than You Realize For College @ FreeFromBroke.com
• Living On Your Own Isn’t Cheap @ Studenomics.com
• Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
• Do What You Love, Love What You Do @ GenXFinance.com
• Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com

I first started getting financially savvy by (yes, this is true) reading personal finance blogs. But I had a little bit of trouble with it, because there was just too much information – and a lot of it didn’t apply to me, at least until I knew where to start.

So, if you anything like me, you might need it boiled down before you can start digging in and trying all the tips, tricks, and plans outlined on the internet and in personal finance books. Hey, I understand – I was there, and I feel like I wasted a lot of time just trying to figure out how to start.

So, to save you a little time, I’ve thrown together this Quick Start Guide, pieced together from my favorite bits of other personal finance blogs and books (links at the end), and from my own experience. It’s only three steps, so don’t panic! Enjoy!

RULE ZERO: SPEND LESS THAN YOU EARN

Rule Zero is at the heart of everything else – everything in this guide, everything on this site, everything on the other PF sites and in all the books. Spend less than you earn, and save the difference. But how? HOW?

Step #1: Track what you spend

In order to spend less than you earn, you have to know what you spend, and what you earn. Knowing what you earn is generally pretty easy – for most people, you just add up your paychecks, and you’re done. Boom. But what you spend? That tends to escape most of us unless we write it all down.

I don’t care how you track it. I use a simple Excel spreadsheet that I made. A lot of people use a little notebook and pencil that they carry around with them at all times. Some people keep all of their receipts in one place and then write it all down at the end of the week. Some people carve it into a wooden block, because those people are crazy.

This step is rather important, so I implore you not to skip it. Of all the tools I have made for myself on my journey to financial freedom, none have been as useful to me as my spending list has been. I’ve been keeping it for over a year now, and I still wish I had more data. (I love data.)

Step #2: Don’t pay the bank, make the bank pay you

Once you start tracking your spending, you’ll probably see a few expenses that you just wish you weren’t paying. If any of those expenses are bank fees, stop. Stop now. If you really like your bank, go in and ask if you can have the bank fees waived for your account.

If that doesn’t work (or if you just want to switch banks), shop around for a free checking account. You can usually get a free checking account pretty easily if you’re a student, or if you can do a qualifying monthly direct deposit. Or you can use ING’s Electric Orange checking account, which has no maintenance fees.

Also, make sure you have a savings account, and that it’s paying some actual interest. Most brick-and-mortar bank savings accounts offer interest rates around .2% (that’s POINT two percent, or one fifth of one percent), and considering inflation averages out at about 3%, that makes your “real” interest rate around -2.8%. That’s terrible. Online savings account offer rates upwards of 4%, which beats average inflation and gives you a little something extra. I have online savings accounts with Emigrant, E*Trade, Citibank, and ING Direct, and although I’ve never had any problems with any of them, the one I recommend more than any of the others is ING’s Orange Savings.

Step #3A: Take down debts

(If you’re debt free or your debts all have interest rates of less than 8%, skip to Step #3B.)

Debt – your future money that someone else has a claim to. Ick – let’s get rid of that. Use this calculator to snowball your debts – whether you pick the “interest order” or the “balance order” depends on whether you feel better knowing your saving the most amount of money, or feel better knocking down debts as if you were shooting in Duck Hunt.

If you have some wacky debts that make it impossible for you to use the snowball calculator with any sort of accuracy (for example, you might be like me and have student loans that are in deferment), then just rank them for yourself on a piece of paper. But no matter what, pay the minimum payment on all of your debts every month and throw whatever else you can at the debt on the top of your snowball list. 

 Step #3B: Save up some savings

Start with an emergency fund. You probably know better than anyone how much of one you should probably have, but the rule of thumb that’s generally thrown around is “3 – 6 months worth of expenses,” more if you have dependents. If you’re a college student or anyone else with strange, unpredictable, lower expenses, you might just want to pick a nice round dollar amount, like $1,000.

Don’t feel like you have to build this all up as fast as possible, although it is important, so don’t shrug it off either. How much you throw into your savings probably has a lot to do with whether you have a lot of debts from Step #3A or not. If you’re paying on a lot of high interest debts, it makes more sense to worry about knocking those out, and only build your savings up by about $10-$20 a week (or per month, if you’re a college student or younger). Otherwise, try to save at least 10% of your income, bare minimum – more than that is better.

It might hurt at first, and you might not even be able to save that much at first. Don’t freak out – just save something. Even if it’s $5 a month. Or $1 a month. Get in the habit and try to increase it each month. The habit is 90% of the process, the dollar amount is only the other 10%.

(It might seem obvious to some people, but this savings should be going into a high yield account, like one of the ones I suggested in Step #2.)

Beyond (Thunderdome)

Once you’re tracking what you’re spending, your bank accounts are in order, you’re snowballing your debts, and putting something aside into savings, you’re ready to start sifting through the vast amounts of information out there. Time to move into budgeting and frugality and retirement accounts and all of those things that might seem very daunting right now. Once again, don’t panic. You’re already ahead by having made it through this guide, the next steps are just as simple.

Like I said, this quick start guide is borrowed and pieced together from the things I read when I was starting out, and the things I’ve read since. Once you’ve made it through this guide, here are three other guides that you might want to try out:

• I Will Teach You To Be Rich » 2006 Makeover – This link leads you to Step 4 of Ramit’s makeover, which includes links to the previous three steps.
• The Simple Dollar » 31 Days To Fix Your Finances: A Wrapup – Trent’s super-comprehensive guide will have you examining your goals and developing a definitive vision of 
• 8 Ways to Take Control of Your Finances in 2008 ∞ Get Rich Slowly – As usual, JD says more than me, better than me, in less words. Check it out!

Photo credits: YTaP’s “Eat Money”, Kris Taeleman’s “Money, i has it!” and Digital Sextant’s “Money”

Reader Hollie came to me with the following email:

I owe just under $1,000 on my credit card. They really got me this last time. In July they tacked on the late fee because I didn’t pay by 2:00 on the deadlined day!
Have you ever heard of this? Now it’s just getting worse every month. What can I do? My credit report is not excellent either and my future is grim? What can I do? Please help.
Thanks
Hollie

The usual disclaimer: I’m not a financial adviser, and even if I were, I don’t know the specifics of Hollie’s situation or anyone else’s who might read this. All I can do is tell you the processes I go through, and what I might do myself in Hollie’s situation.

First of all, Hollie’s future is not grim. There are no money problems that can’t be fixed with time and effort. Things fall off of credit reports eventually. Debts can be repaid. And late fees can be waived.

Unfortunately, the credit card companies are well within their rights to charge a late fee for not paying by 2:00 on the due date – assuming it’s in the lengthy and unreadable terms and conditions, which it probably is. Unfortunately it sounds like it might be too late to do this in Hollie’s case, but it might be possible to get such a late fee waived. A polite call or email to the credit card customer service might just get that late fee refunded.

Whether or not that late fee is refunded, it’s now time to take steps to make sure it doesn’t happen again. Here’s the system that I use to avoid late fees and overdrafts. In fact, the following is the basis for my whole financial plan (it isn’t really a “budget” per say, but it could be the basis for a budget):

1) Calculate how much you have to pay each month
This is the bare minimum you have to pay on every bill. For me, this is my minimum credit card payment, my car payment, my laptop payment, and my student loan. Later on in life, this will include rent, utilities – anything that absolutely must be paid each month.

I like to add a dollar to the minimum payments for the credit card and student loan, for credit reporting reasons – that way it won’t show up as “minimum payment” on my credit report. But if I were really strapped for cash, I could go back down to the absolute minimum payments.

Once I have all of those things written down, I add up the total.

2) Calculate how much you have coming in each month
This can include one-time “cash reserves” – in other hand, the money I already have in my wallet, checking, and savings accounts. I add that to the amount I expect to make over the next month. I keep in mind though, the cash reserves are “one time only,” – but I’ll come back to that in a later step.

3) Is the total from Step 2 more than the total from Step 1?
Hopefully, the total from Step 2 is more than the total from Step 1 without counting the cash reserves. If it isn’t, I have a small problem: eventually, I’m going to start running out of money and start falling into more debt than I’m already in.

The problem is even bigger if the total from Step 2 is less than the total from Step 1, including cash reserves! Either way, if the answer to this question is “No” (with or without cash reserves), then I need to go to Steps 3a and 3b. If the answer is “Yes,” then I can move right onto Step 4.

• 3a) Can I cut any expenses?
  Are there any expenses from Step 1 that I can cut or reduce? In my case, it would be rather difficult. I can’t return my laptop or my car, and I can’t stop making payments on my credit card or student loans.
  However, if I had things like cable, Netflix subscription, or anything else that isn’t completely necessary, I could find ways to temporarily reduce the price (drop down to a lower tier package) or I could temporarily cancel them.
• 3b) How can I make more money?
  If I can’t cut any expenses, or I do and it’s not enough, I absolutely need to figure out how to make more money. Pick up more hours on my job? Get a second job? Make some money online? Whatever I can do to get the bills paid.

4) Pay the bills when they come, not when they’re due
This step is key. Instead of opening my mail and saying “ok, the credit card is due on the 25th, I have to remember to pay that” – I ignore the due date completely. I head right to my computer and pay the bill online. Or I cut a check and mail it off right then.

Why? Because this completely removes the chance of late fees. And, as an added bonus, it gives the balance on my credit card less time to accrue interest. And it saves me from having to remember to do things “before they’re due” – which is something I’m horrible at!

What if I don’t have the money in my account to pay the bill the minute it comes? Well, I stick it in my “inbox” and as soon as the next paycheck clears, the second thing I do is pay the bill. What’s the first thing? I put 10% of the paycheck into my savings account. My savings are the most important bill of all – they get paid first.

5) Keep it going
Find a way to keep track of it all: “How much is going out every month? Do I have enough coming in to pay it? Did I pay that bill this month?” I keep track of everything in an Excel sheet I made myself, but there are many other free options available on the internet. The one I most recommend is Pear Budget. It’s free and extremely easy and simple to use. And it gets the job done.

Hollie: Don’t fret. You can do this, I can tell. Since you’re reaching out to me for help, I can tell that you want to fix this. And that’s all you need to get started: the will to help yourself. It’s where I started out, and it’s what helps me get through every single month.