Monday, March 31, 2008
THE RULE OF 72
Ever hear of it? It's explained here.
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.
At 10% interest it takes approximately 7.3 years for the original investment to double.
It's been a long time since we saw 10% interest on savings accounts; and at the time when we did see it, we also saw inflation at a high rate.
Of course getting interest means that someone is paying interest. If it's a savings account, the payor is the bank. They have to get the money somewhere. One of the ways that they get cash is by creating money--otherwise known as credit cards.
Not only the banks, but other businesses create cash in this way. There is hardly a department store left that doesn't have their own credit card. Of course there's a bank back there in the support structure somewhere. Fail to pay off the balance some month and find out what happens to your bill. Eighteen percent is pretty common. At 18% it takes four years for the investment to double (72 divided by 18 equals 4). But this time it isn't you who reaps the benefits, it's the credit card company. At this rate of return who needs profits on sales?
Susanna tells me Macy's charges 22.9% on the unpaid balance. I looked at the back of my Macy's statement where all the fine print is written. They talk about a minimum finance charge of $1, but after three readings I still couldn't find the rate. At 22.9% the investment doubles in 3.1 years. And that doesn't take the late fees into consideration.
I'm beginning to see how Macy's can offer all those bargains on Alfred Dunner clothes near the end of a season. Run up a big enough bill and those clothes aren't a bargain anymore. And the temptation is oh so great to fill the closet with new stuff when the price tag is oh so low. Couple that with all the coupons sent to credit card customers, and the discount offered to customers who pay with a Macy's card. It almost appears wasteful to let the clothes hang on the rack. Of course if your bill gets lost in the mail, you're going to be in for a nasty surprise!
I wonder if Macy's sells Alfred Dunner at a loss and makes up the shortfall with credit card interest? Could it be that we are being duped into thinking Macy's is in the business of selling goods when their real money-making business is usury?
Now what is the definition of extortion again...???