Before we plunge into the world of finance, let’s review the rule of 70. Suppose your rich aunt hands you a $3,000 check at the end of the school year. She tells you it’s for your education. But what should you really do with that extra money? Let’s see how much it would be worth if you saved it for a while.
a. If you put it in a bank account earning 2% real annual return on average, how many years would it take before it was worth $6,000? Until it was worth $12,000?
b. If you put it in a Standard and Poor’s 500 (S&P 500) mutual fund earning an average 7% real return every year, how many years would it take before it was worth $6,000? Until it was worth $12,000?
c. Suppose you invest a little less than half your money in the bank and a little more than half in a mutual fund, just to play it somewhat safe, so that you can expect a 5% real return on average. How many years now until you reach $6,000 and $12,000?