Dubai: Everyone wants to know how soon they can double their money and what rate of investment return is needed to double their money in the next 3, 5, or 10 years?
There’s actually a simple trick that allows you to quickly estimate when you can double your money. It’s called the Rule of 72.
The ‘Rule of 72’ is a time-tested formula used by both old and new investors every day to estimate the amount of time it will take to double their investment.
This is true whether it be in a particular stock, a retirement account, or a savings account. It’s simple to learn and easy to use so it’s a great tool for all investors to have in their back pocket.
It’s a shortcut that you, as an investor, can use to estimate if an investment will double your money quickly enough to be worth pursuing.
When you see how quickly your money can double, you’ll understand the power of compound interest.
The ‘Rule of 72’ paints a picture of how quickly your money can grow without any additional investment on your part.
What is the ‘Rule of 72’ formula?
You don’t need a ‘Rule of 72’ calculator to figure out this equation – it’s easy. Simply divide 72 by the fixed annual rate of return and you’ll know how many years it will take for your money to double.
If you’re trying to compute when your money will double at a given interest rate, determine the interest rate you need your money to double in a set timeframe by simply dividing 72 by the number of years.
Here are some examples and real-life illustrations
Here’s a basic example of the ‘Rule of 72’ that we can do without a calculator:
Given a 10 per cent annual rate of return, how long will it take for your money to double? Take 72 and divide it by 10 and you get 7.2. This means, at a 10 per cent fixed annual rate of return, your money doubles every 7 years.
Here’s another one: Given a 9 per cent interest rate, how long will it take to double your money? Divide 72 by 9 and you’ll get 8 years.
Let’s now apply this to a scenario where you already know the number of years you need to double your money, so you need to solve what the interest of your investment will be. You just need to reverse the equation.
Say you want to double your money in 3 years so you can put a down payment on a house.
Divide 72 by 3 to get 24. You will need a 24 per cent rate of return on your investment. If you later decide not to buy the house and you left your money invested for another 6-7 years, then it would double two more times!
If you started with Dh10,000, then after 3 years you would have Dh20,000. After another 3 years, you would have Dh40,000, and after another 3 years, you would have Dh80,000. That’s eight times more than what you started with, plus it only took 9 years given a 24 per cent annual rate of return.
That’s the power of compound interest and what makes investing an incredible way to grow your wealth over time.
Key drawback: The ‘Rule of 72’ is an estimation, not an exact math
Take the example above. When saving up to put a down payment on a house, the exact number of years it takes to double an investment at a 24 per cent growth rate is 3.2 years. While this is extremely close, it’s not 100 per cent accurate.
The ‘Rule of 72’ is the most accurate with fixed interest rates around 10 per cent, but the farther you get from 10 per cent, the less accurate it becomes.
When investing in stocks, you won’t experience a fixed annual rate of return. The stock market is volatile and doesn’t guarantee consistent returns, especially in the short term.
This is why we evaluate a company thoroughly before investing in it so we know what average annual rate of return we can expect over the next five to ten years.
For our purposes, the ‘Rule of 72’ is accurate enough to give us a general idea of when we can expect our money to double.
There are so many scenarios where this easy formula can help you - from planning for the future and evaluating an investment to understanding the impact of debt.
How the ‘Rule of 72’ helps plan your financial goals?
Like the example above, you can use the ‘Rule of 72’ to determine when you will be able to make a big future purchase, like a house. But, it also can be useful for a lot of other financial goals you have.
If you have financial goals where you want to know how long it will be until you meet them, or you want to know what interest rate you need in order to reach your 5 or 10-year goals, then use the ‘Rule of 72’.
For instance, if you need Dh100,000 to pay for your child’s college in 10 years, and you start with Dh50,000, then you’ll need a 7.2 per cent (72 divided by 10) annual rate of return on your investment.
But, if you start with Dh15,000, you’ll need your money to double 3 times in the next 10 years. This means you’ll want your money to double every 3.3 years and with a 21.8 per cent (72 divided by 3.3) annual rate of return on your investment.
If you are investing for retirement, the ‘Rule of 72’ can be extremely beneficial. The amount of money you will need for retirement is a big number, but if you start early, even a small amount of money can double over and over again.
The ‘Rule of 72’ will tell you: The less time you have until you retire, the larger the annual rate of return you will need on your investments. On the other hand – if you have a long time until you plan to retire, you may be able to aim for a smaller annual rate of return.
Let’s say you are comparing two potential investments; one will give you an 18 per cent average annual rate of return, and the other is 14 per cent, then you will double my money a year sooner if you go with the investment that could produce an 18 per cent annual rate of return on average.
If you leave the investment alone for 15 years, the first option will nearly double almost 4 separate times, while the second option will have only doubled 3 times.
How the ‘Rule of 72’ helps you better understand debt
Just as compound interest works for you when you have money invested, it will also work against you when you have debt.
Say you have credit card debt with an annual interest rate of 20 per cent. Even if you make the minimum monthly payments on that card and don’t spend anything else, the amount you owe will double in 3 and a half years.
So, if you have debt, the ‘Rule of 72’ will compel you to get rid of it as quickly as possible.
How the ‘Rule of 72’ works in doubling your money?
The ‘Rule of 72’ allows you to quickly estimate when you can double your money. The ‘Rule of 72’ teaches us that an investment that produces high returns will help double your money fast.
Divide 72 by the annual rate of return to figure how long it will take to double your money. Let’s say you target an average annual growth rate of 26 per cent.
This means your money will double every 3 years. But you can’t get these high returns with just any investment. You have to pick the right companies that will generate great returns year over year.
If you earn an 8 per cent annual return, it will take about 9 years to double. So the higher the return, the faster you can double your money.
But remember it’s an estimate, so your number will give you only an approximate number. Plus, the bigger issue is if you’re investing in financial markets, your return will vary significantly from year to year. So your returns are likely to vary each year than the averages.
There are multiple ways to double your money, like using a diversified portfolio or investing in speculative assets, which involves buying assets with the hope that it will become more valuable in the near future.
Speculative ways to double your money may include option investing, buying on margin, or using marginally-priced stocks.
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Broadly, investing to double your money can be done safely over several years, or quickly, although there’s more of a risk of losing most or all of your money for those that are impatient.
But if you’re looking to double your money in any reasonable time frame, it involves a certain degree of risk. You simply won’t be able to earn enough from safe bank products to reach that goal.
Above all, it’s important to remember that you don’t have to make the riskiest trades – ones that look more like gambling than investing – to build your fortune.