How long will it take me to double my money?
We all want to double our money right? This is the whole entire allure behind gambler’s “putting it all on black.” Plus, as the saying goes, if you double your money you double your fun. Count me in!
But there’s an easier way to double your money without the risk of losing everything to a rich casino owner. It involves smart investments and the magic of compound interest.
Taking this approach does require a little more time and patience than one spin of the roulette wheel, but on the plus it comes with the added benefit of not losing everything in the blink of an eye. Just how much patience? The rule of 72 is here to help.
The rule of 72 is a financial shortcut that tells you approximately how many years it will take you to double your money, given a specific rate of return.
Typically in finance, calculating the doubling time requires the use of complex future value algebraic equations or dusting off the old financial calculator. With the Rule of 72, we can get an approximate answer using nothing more than basic division.
How to Calculate the Rule of 72
It’s pretty simple:
Divide 72 by the rate of return = the number of years for your investment to double
Let’s see it in action. If you have an investment which returns 12% every year, divide 72 by 12 and you get 6 years. Pretty easy!
This. Changes. Everything.
Here’s the amazing thing about the Rule of 72. Your investment doesn’t just double once and stop. In the above example, your money keeps doubling every 6 years. Forever.
This is the magic of compound interest at work. Let’s keep it rolling, remembering that our initial investment was $10,000.
Amazing isn’t it? In this example, a 22 year old could take $10,000 from his first salary, and by the standard retirement age of 64, his investment would have doubled and doubled itself to a startling $1.2 million. Even the best money wizard would be impressed by that sort of magic!
What Else the Rule of 72 Means
There’s an important first step in benefiting from the rule of 72. You have to invest your money!
The rule serves as a friendly reminder that unnecessary purchases not only hurt your wallet today, but they hinder you from experiencing that doubling magic, every few years, forever. Like an annual light storm or lunar eclipse, every few years it occurs and you just have to stop and marvel at the beauty.
Let’s imagine our 22 year old friend foolishly spent that $10,000 after going to Vegas and losing it all on black like an impatient fool. His retirement aged self would be $1.2 million poorer! That’s a lot of vacations.
The Hidden Cost of Not Investing
There’s another interesting, and perhaps more alarming, tidbit we can learn from the Rule of 72: the hidden costs of not investing.
Historically, the average inflation rate in the United States is right around 3%. At first glance, this doesn’t seem too bad.
But using the rule of 72, we know that a 3% return doubles ever 24 years.
This has a huge implication. Any savings which are not invested will lose half of their value to inflation every 24 years.
Sorry doomsday preppers, burying your cash in the back yard is not a wise financial decision.
Putting the Rule into Action
The rule of 72 is intended to be a fun, rough guideline. In practice, rates of return are rarely constant, and varying interest rates as well as the order of returns have very real impacts on your portfolio’s bottom line. But as a quick and dirty roadmap, the rule of 72 is a powerful estimation and an incredible example of the power of compound interest.
As an investor, time is your greatest asset. Every day, month, and year that your money sits idly is time that you can never get back. The sooner you invest, the sooner The Rule of 72 can be on your side.