How Long Will It Take To Double Your Money?
Image courtesy Michał Parzuchowski | Upsplash
First thing’s first - I’m not talking about slots, craps, or poker here (despite the image above.)
When we start working with our clients, one of the first things we ask is what they want their money to do for them. An answer we often hear is: “grow!” (Hi captain, I’m obvious.) What we’re really getting at is: how do you want to use your money (or for it to be used on your behalf?) Still, the default response is totally fair and warrants some attention. After all, if our money isn’t growing, it might as well be shrinking (due to the general cost of all things in the world naturally trending up as time goes on. You may have heard that i-word mentioned a lot in the news recently!)
While we’re at it, let’s not just grow our money, let’s double it! But how long will that take? Well, the answer is: it depends on how long you’re investing, and how much you’re earning on your money. However, there is the Rule of 72, which can give you more of a mathematical answer.
The Rule of 72 works like this: if you want to double your money at a certain rate of return (say, 3%), take 72 and divide by that rate of return, in this case, 3. The answer is the number of years it will take to double the value of your investment.
So, at a 3% annual compounding rate of return, it would take 24 years (7 divided by 3) to turn $50,000 into $100,000 (double your original amount of $50,000).
Most people don’t know what type of return they’ll get, so we can work this backwards as well. Say you want to double your money in 10 years. 72 divided by 10 is 7.2%. If you earn this annually for 10 years, your $50,000 will have become $100,000.
While this seems like a great little tool, just like anything, there are some imitations. he rule of 72 works well as a thought experiment, but reality is, unfortunately, a bit more complicated and less straightforward.
First, there are always taxes to think about. Growth in the form of interest and reinvested dividends is taxable every year, regardless of whether you spent it, and capital gains could be too, depending on the fund you use and whether it’s wrapped up in a retirement account.
Speaking of funds, if you’re investing for long-term growth, it’s not going to happen in a straight line. Some years you might earn 10%, and others you might earn 2%. Some years may actually end with a negative return. Generally speaking, more risk means more rewards. Risk when it comes to investing comes with natural, to-be-expected fluctuations in account value due to a myriad of variables totally out of our control (but being able to look back and see that over long enough periods of time, markets have historically done well.)
So while the rule of 72 could be helpful for you to decide if your goals are realistic, and when they might be achievable, remember that it’s not without limitations.
The most important part of financial planning (at least for us when working with our clients!) is to focus on your goals. Despite being all about money, this is really less about the numbers and more about what you want to do with your life. Then those numbers can help determine how realistic your goals are.
Not sure where to start? We are always happy to chat about your goals and help you create a plan to achieve them.
About the Author
Scot Whiskeyman, CFP® is a CERTIFIED FINANCIAL PLANNER™, author, and co-owner of his financial planning firm, Providers & Families Wealth Management.
Important Disclosures: Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Please consider, among other important factors, your investment objectives, risk tolerance and time horizon. Speak with your financial professional or investment advisor before implementing any changes to your investment strategy, and speak with a tax professional about possible tax consequences as we do not provide tax advice.
