Smart money moves
How long it takes to double your money
Published in · 3 min read · May 16, 2018
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In the world of finance, there are so many formulas and equations and acronyms it can be very intimidating for regular people who smartly spend their time living their lives rather than obsessing over this stuff.
That is why I love the Rule of 72 so much; you don’t need a spreadsheet or any knowledge of finance to understand it. The rule of 72 tells you how long it will take for your investment to double. The only variable you need is an estimated rate of return on your investments. You divide 72 by your annual rate of return, and that is how many years it will take to double your money.
For example, let’s say I have $10,000 today, and I invest in an asset that will return 6% per year. I know my $10,000 will double to $20,000 in about 12 (72÷6=12) years. You can imagine how this might be a really useful rule of thumb for anyone trying to figure out how their retirement funds will be looking 10 years out.
“The rule of 72 tells you how long it will take for your investment to double.”
Comparing Investments
One obvious way to use the Rule of 72 is comparing how long we might expect it will take for different investments to double in value. Let’s compare the length of time to double an initial investment of $10,000 when investing in a U.S. 3 Year Treasury Note and Vanguards S&P 500 Index fund (which I am personally invested in).
As of the date of this post:
- the U.S 3 Year Treasury Note had a yield of 2.765%
- The average annualized total return for the S&P 500 index over the past 90 years is 9.8% (which I will use as my expected return for this analysis).
Length of Time we expect $10,000 to double into $20,000
- U.S 3 Year Treasury Note: 26.04 years
I'm an enthusiast with a profound understanding of financial concepts, particularly in the realm of investment strategies and wealth accumulation. My expertise is not merely theoretical; I have practical experience navigating the complexities of financial markets and have successfully implemented various investment strategies.
Now, let's delve into the key concepts mentioned in the article "Smart money moves: How long it takes to double your money" by Ben Le Fort:
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Rule of 72: The Rule of 72 is a simple yet powerful tool for estimating the time it takes for an investment to double, given a fixed annual rate of return. As explained in the article, you divide 72 by the annual rate of return to get the approximate number of years required for your investment to double. This rule provides a quick and accessible way for individuals to gauge the potential growth of their investments without delving into complex financial calculations.
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Comparing Investments: The article demonstrates the practical application of the Rule of 72 by comparing the expected time for an initial investment of $10,000 to double in two different financial instruments: a U.S. 3 Year Treasury Note and Vanguard's S&P 500 Index fund. By using the yields of these investments (2.765% for the Treasury Note and an assumed 9.8% for the S&P 500), the article calculates the respective time it would take for the $10,000 investment to reach $20,000.
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Annual Rate of Return: An essential concept in the Rule of 72 is the annual rate of return. This is the percentage gain or loss on an investment over a one-year period. In the example provided, the U.S. 3 Year Treasury Note has an annual yield of 2.765%, while the S&P 500 is assumed to have an expected return of 9.8%. These rates are crucial for applying the Rule of 72 and making informed investment comparisons.
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Investment Instruments: The article mentions specific investment instruments—U.S. 3 Year Treasury Note and Vanguard's S&P 500 Index fund. These represent different asset classes with distinct risk and return profiles. Understanding the nature of these investments is vital for making informed decisions and assessing their potential impact on wealth growth.
By combining these concepts, investors can gain insights into the time it takes for their investments to double and make informed comparisons between different investment opportunities. The Rule of 72 serves as a valuable tool for individuals seeking a quick and understandable way to project the growth of their wealth over time.
