Here is a little trick you can use to work out the number of years it will take to double your money. It is called the “Rule of 72” and used by investors to get a rough estimate of how many years it will take for the investment to double itself.
Years to double = 72 / Interest Rate
- Let’s say you want your money to double in 6 years. What interest rate would you need to earn? All you need to do is divide 72 by 6. You’d need to earn a 12% interest rate for your money to double in 6 years.
- To estimate how long it will take for your money to double at current interest rate, simply divide 72 by this interest rate. At 5% interest, your money will double in 14.4 years.
- It goes the other way too. If inflation rates is at 3%, your money will lose half of its value in 24 years if you do not invest.
A word of caution – inflation can play a big part in the final result. For example, current inflation is at 2% and interest rate is at 5%. Therefore your money will double real terms in 72 / (5%-2%) = 24 years instead of 14.4 years as mentioned above. Inflation cuts the buying power of your money.
This is a “rule of thumb,” not a law. The Rule of 72 doesn’t adjust for details that make a significant dent in your returns, like taxes and your fund’s administration fees.
However the Rule of 72 is a great mental math shortcut. The moral is: you want to keep your money invested in vehicles that are very likely to outpace inflation. Inflation is public enemy #1 when it comes to wealth creation. It can silently erode the value of your money.
What do you use to improve your financial position?