Calculate How Soon Your Investment Will Double Using the “Rule of 72”
How do you know if you have invested your money correctly in a savings or investment vehicle? You may be asking yourself how long it will take for your money to double, depending on the interest rates you are currently receiving – and there is a formula that makes this calculation really simple.
As CNBC explains, you can use Rule 72 to estimate how long it will take for your savings or investment to double, given a stable rate of return:
The formula is simple: 72 / interest rate = years to double.
Try setting different interest rates on different accounts that hold your money, from savings and money market accounts to index and mutual funds. For example, if your account earns:
1% it takes 72 years for your money to double (72/1 = 72)
3% it takes 24 years for your money to double (72/3 = 24)
6% it takes 12 years for your money to double (72/6 = 12)
9% it takes 8 years for your money to double (72/9 = 8)
12% it takes 6 years for your money to double (72/12 = 6)
For example, the My Capital One 360 savings account brings in 0.63% per annum. Using Rule 72, my money will only double on an interest basis in 114 years. This, of course, does not include any additional contributions to a savings account; I could double the amount in my savings account by investing more money over time, but it will take me 114 years for my money to double using the so-called compound interest magic.
On the other hand, my Vanguard investment accounts have a cumulative return of 10.3%. Rule 72 suggests that my money could double in 7 years, although this is only if the market maintains a 10.3% yield during that period. My money can double faster – or slower – depending on what’s really going on.
Rule 72 does, of course, reveal the ability to find the savings with the highest growth potential. Yes, investing in the stock market – even in low-cost index funds – can be risky, but leaving money in a savings account comes with certain risks. When I opened my savings account in 2010, it offered 1.10% per annum; ten years later, the interest rate is almost half.
Rule 72 also reminds us of the strength of one percentage point. If you have a choice between investing in a savings account with 1% APY and a similar account with 2% APY, well … it’s like asking yourself if you want your money to double in 72 or 36 years.
So count the numbers and ask yourself if it’s time to start looking for the best place to save money. In my case, I need to figure out how to turn my Capital One 360 savings account into a Capital One 360 Performance savings account that currently offers 1.70% per annum – and could double my money in just 42 years.