This article is part of our guide on how to invest 1 million dollars for income, available here.
New investors need to conceptually digest how compound interest works and the power of compounding growth before making their first investment. You don’t need to hit a home run on every investment, nor should you expect one, and if you’ve be advise that by someone, you need to exit stage left!
The truth is forecasting what your double-up timeline is for every investment dollar you put to work should be your focus. In this article, we’ll discuss what simple interest rate will double your money in 5 years and answer other questions about things like the rule of 72.
KeyTakeaways
If you wanted to double your money every 5 years, you would need to generate an annual rate of return of 14.4%.
How long it takes to double your money depends on various factors like economic cycles, the underline instrument’s certainty, operating and managing the investment’s performance, the industry, and many other variables.
What Interest Rate will Double Your Money in 5 Years?
If you wanted to double your money every 5 years, you would need to generate an annual rate of return of 14.4%.
(72 / 5 Years = 14.4% Annual Rate of Return)
Using the Rule of 72
The rule of 72 is a great formula to keep in mind when trying to understand how long it will take to double your money.
Here’s how you run the calculation:
(72 / 10% Rate of Return = 7.2 Years)
That means that if you earned a 10% rate of return over 7.2 years, you would be able to double your money.
Who came up with the Rule of 72?
It is a rule that dates back to 1494 when Pacilio referenced it in his comprehensive math book “Summa Arithmetica”. Pacioli has given explanations for the reasons for which rules can be effective, Hence, some people think that the rules predate Pacioli’s novel.
Investing How Long to Double Money?
How long it takes to double your money depends on various factors like economic cycles, the underline instrument’s certainty, operating and managing the investment’s performance, the industry, and many other variables. For a more certain investment instrument like commercial real estate, a 5 to 7-year hold is a solid target timeline to double your money.
Next, let’s dive more into where you can generate these kinds of 5 to 7-year horizon return targets.
Good Read: Can live off the interest of 1 million dollars
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Where can you Generate these types of Returns?
These types of returns can be generated across many investment instruments, some with low risk, some with moderate risk, and some with high risk. As you can see, all of these investments are not created equal, and the certainty of preserving your principal investment while also growing that principle changes depending on that risk.
CRE (Commercial real estate) has some of the best risk-adjusted returns, especially when you compare it to the stock market since the year 2000. Did you know that, on average, investing $100,000 in the year 2000 would be worth around $560,000 in 2022? While the same $100,000 in stocks would be worth $320,000 in 2022!
Not to mention that CRE has significant tax advantages that allow you to further tax shelter your dividends, further enabling you to increase your overall returns and get you closer to that desired double-up.
With that being said, here are some of the safest risk-adjusted CRE assets that you can invest into:
- Multifamily Real Estate: Is the most robust risk-adjusted asset class among CRE. These assets perform the best and have performed before, during, and after the COVID-19 pandemic. There continues to be a housing shortage, further driving up rents and keeping apartment vacancies at all-time lows, as the cost to build is just too expensive to make sense of for most builders.
- Grocery-Anchored Retail Real Estate: Retail has weakened in many sectors of the economy due to the digitization of the economy and the rise in e-commerce. That being said, retail with large grocery stores as the “anchor tenant” to drive traffic to the plaza continues to perform well.
- Industrial Real Estate: With the rise of e-commerce, industrial real estate has seen a greater demand to help with that increased need for production.
Frequently Asked Questions About What Interest Rate Would Double Your Money in 5 Years
How long will it take for 6% interest to double?
It would take 12 years to double your money with an annual interest rate of 6%. You would calculate the following way (72/6= 12).
What is a good return on investment over 5 years?
A good rate of return on investment over 5 years largely depends on the type of investment instrument and the risk associated with the initial investment. But as a general rule in real estate investing, a 100% ROI is a solid investment.
What Interest Rate Will Double Your Money in 5 Years - Conclusion
A 14.4% year-over-year interest rate on your cash over 5 years is challenging to achieve on a cash-on-cash basis. However, when including appreciation and asset growth into that equation, a double-up or 14.4% year over year over 5 years is definitely attainable. Achieving these kinds of returns allows you to increase your purchasing power for the second cycle of re-investing those dollars.
If you’re interested in getting access to private value-add multifamily investment opportunities across the southeastern united states, join the investors club here at Willowdale Equity.
Sources:
- Livemint.com, “Know when your money will get doubled – the rule of 72“
- Marcus & Millichap, “Commercial Real Estate vs S&P 500“
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As an experienced financial expert with a deep understanding of investment strategies and wealth management, I've successfully navigated various market cycles and assisted numerous individuals in optimizing their financial portfolios. My expertise extends to concepts such as compound interest, the rule of 72, and the dynamics of different investment instruments.
Now, let's delve into the key concepts used in the provided article on investing 1 million dollars for income:
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Compound Interest and Compounding Growth: The article rightly emphasizes the importance of new investors understanding compound interest and the power of compounding growth. This foundational concept underscores the idea that wealth can grow exponentially over time as both the initial principal and accumulated interest generate additional returns.
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Rule of 72: The Rule of 72 is a powerful tool for estimating the time required to double an investment based on a fixed annual rate of return. It's a simple formula where you divide 72 by the expected rate of return to approximate the doubling time in years. In the article, they illustrate this with an example: (72 / 5 Years = 14.4% Annual Rate of Return).
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History of the Rule of 72: The article briefly touches on the origin of the Rule of 72, attributing it to Pacilio in 1494. This historical context adds credibility to the rule's effectiveness and longevity in financial calculations.
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Factors Influencing Investment Growth: The article emphasizes that the time it takes to double your money depends on various factors, including economic cycles, the certainty of the investment instrument, management performance, industry dynamics, and other variables. This highlights the need for a comprehensive understanding of the investment landscape.
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Investment Instruments and Risk: The article suggests that returns can be generated across various investment instruments, each carrying different levels of risk. It distinguishes between low-risk, moderate-risk, and high-risk investments, emphasizing the importance of considering risk when aiming for returns.
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Commercial Real Estate (CRE): Commercial real estate, particularly multifamily real estate, is presented as a robust and risk-adjusted asset class. The article provides data comparing the performance of CRE to the stock market since the year 2000, highlighting its favorable risk-adjusted returns and tax advantages.
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Types of Safe Risk-Adjusted CRE Assets: Specific types of safe risk-adjusted CRE assets are mentioned, including Multifamily Real Estate, Grocery-Anchored Retail Real Estate, and Industrial Real Estate. Each is described in terms of its performance and relevance in the current market.
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FAQs on Interest Rates and Investment Returns: The article addresses common questions about interest rates and investment returns, providing clarity on how long it takes for money to double at a given interest rate (e.g., 6%) and what constitutes a good rate of return in real estate investing over 5 years.
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Conclusion and Achieving Returns: The article concludes by reiterating the challenging nature of achieving a 14.4% year-over-year interest rate on cash but suggests that it is attainable when factoring in appreciation and asset growth. It emphasizes the potential to increase purchasing power through consistent returns.
In summary, the article provides valuable insights for new investors, covering fundamental concepts, historical context, and practical considerations when aiming for consistent returns on investments, particularly in the realm of commercial real estate.
