Whether you want to evaluate offers that promise to "double your money fast" or establish investment goals for your portfolio, a quick-and-dirty method will show you how long it will take to double your money. It's called the Rule of 72 and can be applied to any investment.
How the Rule Works
To use the Rule of 72, divide the number 72 by an investment's expected annual return. The result is the number of years it will take, roughly, to double your money. For example, if the expected annual return of a bank Certificate of Deposit (CD) is 2.35% and you have $1,000 to invest, it will take 72/2.35 or 30.64 years for you to double your original investment to $2,000. If the expected annual return on a CD is 5% and you invest the same amount, it will take you 14.4 years to double your money.
CDs are great for safety and liquidity, but let's look at stocks. It's impossible to know in advance what will happen to stock prices. We know that past performance does not guarantee future returns. But by examining historical data, we can make an educated guess. According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).
Keep in mind that we're talking about annualized returns or long-term averages. In any given year, stocks might return 25% or lose 30%. Over a long period, the returns will average out to 10%. The Rule of 72 doesn't mean that you'll be able to take your money out of the stock market in 10 years. You might have doubled your money by then, but the market could be down, and you might have to leave your money in for several more years until things turn around. If you must achieve a certain goal or be able to withdraw your money by a certain time, the Rule of 72 isn't enough. You'll have to plan carefully, choose your investments wisely, and keep an eye on your portfolio.
Achieving Your Investment Goals
A professional financial advisor may be your best bet for achieving specific investing goals, but the Rule of 72 can help you get started. If you know that you need to have a certain amount of money by a certain date, for example, for retirement or to pay for your newborn child's college tuition, the Rule of 72 can give you a general idea of which asset classes you'll need to invest in to achieve your goal.
First, you can use the Rule of 72 to determine how much college might cost in 18 years if tuition increases by an average of 4% per year. Divide 72 by 4% and you know that college costs are going to double every 18 years.
Right now you have $1,000 to invest and with an 18-year time horizon, you want to put it all in stocks. We saw in the previous section that investing in the S&P 500 has historically allowed investors to double their money about every six or seven years. Your initial $1,000 investment will grow to $2,000 by year 7, $4,000 by year 14, and $6,000 by year 18. Suddenly 18 years isn't as long a time horizon as you thought, perhaps leading you to rethink your investment strategy.
The Bottom Line
While the Rule of 72 is a good investment guideline, it only provides a framework. If you're looking for a more precise outcome, you'll need to better understand an asset's future value formula. The Rule of 72 also does not take into account the effect of investment fees, such as management fees and trading commissions, can have on your returns. Nor does it account for the losses you'll incur from any taxes you have to pay on your investment gains.
FAQs
You would need to earn 10% per year to double your money in a little over seven years.
What interest rate will double every 7 years? ›
1 At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).
Does a 401k double every 7 years? ›
One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.
Does the S&P 500 double every 7 years? ›
According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time. In some cases, like 1952 to 1955 or 1995 to 1998, the value of the investment doubled in only three years.
Is 7% annual return realistic? ›
In short, the average stock market return since the S&P 500's inception in 1926 through 2018 is approximately 10-11%. When adjusted for inflation, it's closer to about 7%. [Since we're talking citations in this post: Investopedia.]
How long will it take $1000 to double at 6 interest? ›
The answer is: 12 years.
Do investments really double every 7 years? ›
In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double.
What age should you have 100k in 401k? ›
“By the time you hit 33 years old, you should have $100,000 saved somewhere,” he said, urging viewers that they can accomplish this goal. “Save 20 percent of your paycheck and let the market grow at 5% to 7% per year,” O'Leary said in the video.
What is the 7 year rule for investing? ›
Let's say your initial investment is $100,000—meaning that's how much money you are able to invest right now—and your goal is to grow your portfolio to $1 million. Assuming long-term market returns stay more or less the same, the Rule of 72 tells us that you should be able to double your money every 7.2 years.
What is the 12 month rule for 401k? ›
In addition, if the employer cannot distribute the plan's assets as soon as administratively feasible—generally within 12 months of the termination date, then the plan is not considered terminated, and future compliance requirements should be met.
If you keep saving, you can get there even faster. If you invest just $500 per month into the fund on top of the initial $100,000, you'll get there in less than 20 years on average. Adding $1,000 per month will get you to $1 million within 17 years. There are a lot of great S&P 500 index funds.
What is the 7% rule in stocks? ›
However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.
How to turn 200k into a million? ›
Here are the five steps you can do:
- Evaluate Your Starting Point. Putting together $200,000 to invest is no small feat. ...
- Estimate Your Risk Tolerance. Your risk tolerance will determine what investments you're comfortable making. ...
- Calculate Necessary Returns. ...
- Allocate Investments Wisely. ...
- Minimize Taxes and Fees.
Reinvest Your Payments
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What annual rate of interest is required to double an investment in 7 years? ›
A 10% interest rate will double your investment in about 7 years (72 ∕ 10 = 7.2); an amount invested at a 12% interest rate will double in about 6 years (72 ∕ 12 = 6). Using the Rule of 72, you can easily determine how long it will take to double your money.
What interest rate will double in 8 years? ›
If you want your money to double every 8 years, you will need to earn an interest rate of 9% (72 divided by 8).
What interest rate will double money in 10 years? ›
Adjusted for inflation, it still comes to an annual return of around 7% to 8%. If you earn 7%, your money will double in a little over 10 years.
