Do you want to learn how to double your money? The Rule of 72 shows you how to double your money, without taking on too much risk, in about 7 years.
The âRule of 72â states that the amount of time itâll take you to double your money equals 72 divided by your rate of return. For example:
- If you invest money at a 10 percent return, youâll double your money every 7.2 years. (72/10 = 7.2)
- If you invest at a 9 percent return, youâll double your money every 8 years. (72/9 = 8)
- If you invest at an 8 percent return, youâll double your money every 9 years. (72/8 = 9)
- If you invest at a 7 percent return, youâll double your money every 10.2 years. (72/7 = 10.2)
(Note: The Rule of 72 assumes that you reinvest your dividends and capital gains. This rule works because of the wonders of compound interest.)
How realistic are these returns?
The 25-year average annualized return for the S&P 500 (from the time period 1987 â 2012) is 9.61 percent. In other words, if in 1987 you had invested in an index fund that tracks the S&P 500 and you never withdrew the money, youâd have average returns of 9.61 percent per year. At that rate, youâd double your money every 7.5 years.
Itâs important to understand that the market will take a wild swing in any given particular year. During the 25-year time period form 1987 to 2012, the market gave returns as high as 37 percent in the year 1995, and returns as low as -37 percent in 2008. Weâre discussing a long-time average, and the only way to capture that average is to stay on course through thick and thin. Many investors get tempted to buy more when stocks are climbing, or get spooked and sell their holdings during a decline.
What If I Only Doubled My Money Every Decade?
If historical data provides any clue, itâs reasonable to expect that a person can double their money every 7.5 years, according to the Rule of 72.
However, investing legend Warren Buffet predicts that the long-term returns of the U.S. stock market in the 21st century will be lower than what we experienced in the 20th century. He says to expect long-term annualized returns at 7 percent (rather than 9.8 percent). Based on that assumption, the Rule of 72 says itâll take you 10 years to double your money.
Thatâs not bad. Imagine that you invest $5,000 at age 20. By age 30, youâll have $10,000. At 40, youâll have $20,000. At 50, that becomes $40,000.
By age 60, when youâre nearing retirement, youâll have grown your initial $5,000 investment into $80,000.
The Bottom Line: The Rule of 72 teaches you how to double your money, but itâs up to you to take action. Invest in the broad market, stay patient through volatile upward and downward swings, and reinvest your gains.