One Simple Rule to Help You Double Your Money
One of the many questions families and business owners discuss with their CERTIFIED FINANCIAL PLANNER™ (CFP) is, "When can I expect my money to double in value?" Often this topic comes up in the financial planning process when solving for future values of investment portfolios, which are used to determine retirement income scenarios and/or pre-retirement goals such as saving for a second home or future college costs.
There are many ways to map out what you can expect when investing over the long term. One simple approach is known as the "Rule of 72", which calculates how long it will take to double your investment using an assumed rate of return. You don't need a fancy financial calculator - simply divide "72" by the estimated rate of return, and your output will be the years it will take to double. For example, for an investment to double assuming an 8% return, one can expect it to happen in approximately 9 years.
Where the Rule of 72 gets exciting is when you look at multiple compounding periods. Take for example a 30-year-old with a $50,000 account, achieving a 10% average return. The account owner would double their money approximately every 7.2 years! Fast forward to when that same 30-year-old is a little over 50, and that initial $50,000 could grow to approximately $400,000! The moral to the story - invest as EARLY as possible because it's very tough to replace lost years of compounding. Time is valuable!
While compounding return can work for you, it can also work against you when you are paying the interest amount on credit or loans vs. earning it. Credit cards with high balances and high annual rates can add up quickly, making it tougher for you to pay them off over time. For example, a $10,000 credit card balance at 18% interest will double to $20,000 in 4 years. That's quite scary!
So next time you consider investing, think about how much wealth you can build long term if you have time on your side and can be patient.