How long does it take for your investments to double?

The internet is packed with calculators showing how much you need to save to reach a particular target, or what your investments may be worth after a certain time.  But if you want to know how long it will take for your investments to double in value, a simple shortcut is the ‘rule of 72’.

It works like this. You just divide 72 by the return your money is earning, to see the years it will take to double your money. In other words: 72/return = years to double.

If you have $10,000 earning a return of 6%, it’s going to take 12 years to grow to $20,000 (72/6 = 12). Keep that money invested  at the same rate, and it could be worth $40,000 in another 12 years!

It doesn’t matter how much you have invested, the same rule applies. What’s handy about the rule of 72 is that it can also be used to work out how much your investments need to earn to double within a given number of years. Using the above example, if you wanted to double $10,000 in 8 years instead of 12, you’d need to earn returns of 9% annually. And this inevitably means taking on more risk.

There’s nothing magic about the number 72. The formula derives from a for more complex equation for compounding returns. (If you’re interested in algebra, you can Google it). However, the key word here is ‘compounding’.

The rule of 72 assumes you leave your original capital intact to let compounding work its magic. Dipping into an investment will re-set the time taken to double your money.

It’s also important to note that investments rarely deliver the same return year after year. Returns tend to fluctuate, sometimes dramatically, even over short periods. So the rule of 72 offers a very rough guide only.

The rule of 72 also applies to debt. Only this time it works against you. If you have, say, $5,000 in credit card debt at 16% and you don’t pay down the balance, in just 4.5 years the debt will have doubled to $10,000. Great for the bank, disastrous for you!

This all highlights why it’s so important to look for a low rate on debt while exploring opportunities – within your tolerance for risk, for healthy returns on investments.

If you need convincing on the latter, consider this. Right now you’ll be lucky to earn 1% on a savings account. Even if you do, it will take 72 years to double a $10,000 deposit to $20,000. That may be fine if you’re aged five, but it’s not much comfort for the rest of us. By taking on more risk and earning 7% annually, you could double that money in 10 years.

As always, it’s about finding balance in the risk/return trade-off, and building a diverse portfolio that can help your money grow faster, while still keeping risk to a level you’re comfortable with.

Effie Zahos is an independent Director of InvestSMART, money commentator at Canstar.com.au and Channel 9 Today Show.  

For more information on building your wealth click here: https://www.investsmart.com.au/what-we-offer/wealth-planning