How long does it take to double your investment?
The basic answer is way more simple than you’d expect. By applying The Rule of 72, you’ll be able to answer that question since it is an easy mathematical formula which can estimate the number of years required to double the invested money at a given annual compounded rate of return.
The Rule of 72 can also help you calculate what effect fees and inflation can have on your investment. It can also work out population growth and macroeconomic numbers, like Gross Domestic Product (GDP).
The basic formula for the Rule of 72, is 72 divided by the interest rate on an investment. This will give you the number of years it takes to double an investment.
So that means if you have an investment that pays around 5% annual compounded returns, then it will take (72/5) = 14.4 years to double in value.
Naturally if the compounded annual interest rate is higher, say 8%, then the amount of time it takes to double will be shorter, so (72/8) = nine years.
At 6% interest, your money takes 72/6 or 12 years to double.
|Annual return||Number of years to double|
The beauty of the Rule of 72 is you can also turn this equation around and work out what annual interest rate is needed to double your investment against a desired time frame.
So if you want to double your investment in four years, (72/4), then you will need to earn an annual interest rate of 18%. If you want to double your investment in seven years (72/7) then your annual interest rate will need to 10.29%.
|Desired years to double investment||Annual interest rate needed is|
As you can see from this simple equation, the Rule of 72 applies to the exponential growth of an investment based on a compounded rate of return.
It is easy enough to use without calculators and perhaps its main purpose is to help people compare choices of investments. We all want to make more money from our investments so by applying the Rule of 72 to the question “how long will it take to double my money”, this can serve as a very useful guide.
It’s also important to remember that the Rule of 72 applies to investments which pay compound interest, and not simple interest.
Compound interest is the interest calculated from an initial sum of money which is then added to the total which increases each time that interest payment is paid out. This is why compound interest is often referred to as “interest on interest” and it will grow a lump sum faster than simple interest.
Simple interest is different to compound interest in that usually the interest is paid in one hit at the end of a specified period. Term deposits are a good example of this.
Other examples of how you can use the Rule of 72
The Rule of 72 is also a useful tool that is not limited to just working out investment returns and time frames. It can be used on anything that grows at a compounded rate, such as population, macroeconomic numbers, charges, loans or fees that eat into investment gains.
- If GDP grows at 3% annually, the economy will be expected to double in (72 ÷ 3 =) 24 years.
- Similarly, a managed fund that charges 3% in annual fees will reduce the investment principal to half in around 24 years.
- A borrower who pays 15% interest on a credit card or any other form of loans which is charging compound interest will double the amount he owes in just 4.8 years.
- If inflation is 6%, then a given purchasing power of the money will be worth half in around (72 ÷ 6) = 12 years. If inflation decreases from 6% to 4%, an investment will be expected to lose half its value in 18 years, instead of 12 years.
- If a country’s population increases at 2% per year then it will take 36 years to double the number of people.
There is a more complex calculation for working out how long it takes to double an investment value but the Rule of 72 is far simpler and produces an answer which is close to the exact algorithmic value.
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