Want to learn the easiest and quickest way to figure how to double your money and how long it will take?
Then learn about the Rule of 72 and how it demonstrates the power of compounded returns.
The Rule of 72 Basics
For years, savvy investors and financial advisors alike have used the Rule of 72 to get a rough estimate on how to double your money through compound rates of return and the length of time it's invested.
The number 72 is the only number you need to remember.
To figure out how long it takes to double your money is to divide 72 by the annual interest rate you are earning.
Calculating Rate of Return with the Rule of 72
Say you have an investment earning 7.2% per year. How long will it take to double?
The formula says to divide 72 by 7.2 (skip the percentage sign).
The result is 10, meaning a 7.2% rate paid annually and compounded will double in 10 years.
Calculating How To Double Your Money with the Rule of 72
The great thing about Rule of 72 is it can tell you either an interest rate or the number of years needed to double your invested money.
For example, you want to know how to double your money in 6 years.
Again, using the Rule of 72 formula, divide 72 by 6 (or however many years you want your money to realistically double).
Now your result is 12, which means if you can find an investment yielding a stable 12% return for a six-year period, that money will double!
The Power of Compounding
What the Rule of 72 really demonstrates is the incredible power of compounding returns.
There are two types of interest rate returns: compounded or simple interest.
The difference is, with compounded interest the money you earn also earns money. It is essentially reinvested back in the same investment to make the overall return higher.
This is where my fave saying comes from…
“I like the money that my money makes. But I like the money that my money's money makes even more!”
With simple interest, that interest does not get reinvested and does not earn more interest.
This is why you want the majority of your investments producing income (interest, dividends, etc) to compound.
For instance, remember when we calculated that it would take 10 years to double your money at a 7.2% annual rate of return?
Well, if that was not compounded interest, but simple interest, in 10 years you would have received 72% of your money back in interest.
Meaning, you lost another 28% because it was not compounded.
Over a quarter of potential earnings is a big chunk of change to leave on the table! (We'll later give you a great tip on a quality investment with a current 12% compound yield, so read on!)
How Long Before My CD Will Double?
Let's get “real world” with the Rule of 72 now.
The name of the game is not to keep pace with inflation but stay ahead of it.
A quick peek at the inflation rate for 2019 shows a 2.3% inflation rate (compared to 2.1% in 2018). You want to earn more on your money than the rising costs of living, now at 2.3% and trending upward from 2018.
So let's take a look around as to what your trusted banks are offering for a Certificate of Deposit (CD).
As of late January 2020, a CD rate for a 1-year term was 2.15% (note, this was the highest rate we found).
In other words, the best the banks will do for you is 0.15% LESS than the US inflation rate.
Not looking too good so far.
You may want to brace yourself when you run the Rule of 72 on that rate of return.
That's because if your investment is earning an average annual rate of 2.15%, it will take over 33 years to double!
Meanwhile, that 12% investment would have doubled over 5 times in the same period of time!
And guess what …
In 33 years, everything will likely cost way more than double of what it costs today.
For instance, in 1985 (35 years ago), a 1.4-ounce candy bar cost $0.40.
Today, Target will sell you a 1.55-ounce chocolate bar for $0.99. Way more than double — an actual increase of 147.5% while your CD money only increased 100%.
If that candy bar only costs $0.80, you would be breaking even, not getting ahead.
By the way, yes the candy bar size increased over those 35 years, by a measly 0.15 ounce, or a 7.7% rate.
Yep, you're losing ground.
So Where Is That 12% Deal?
We weren't talking theories or fantasies when we used a 12% return as an example for using the Rule of 72.
And when we say a 12% return, we are talking actual income, not crossing our fingers waiting for some impressive capital gains to catapult your return to a 12% compounded yield.
Oh, by the way, that doesn't mean you won't see some nice capital gains. You will also see capital gains over time, some of them possibly impressive.
But consider those capital gains the yummy ice cream we glean from the milk that your cash cows are spewing out, on top of your regular, reliable annual serving of a 12% compounded return!
Now that's some rich milk money!
I'm In! What Do I Do?
Listen, we're not here to strong-arm you into anything.
If you're happy earning returns less than the inflation rate, go for it.
But we know you're smarter than that.
We know you want complete transparency when it comes to dealing with your money.
And you want to use common sense to grow your money wisely yet quicker than most other methods.
Yep, you're in the right place.
We're not into blowing our hard-earned money, but we sure aren't going to let it sit and mold, becoming less valuable every year.
So here's your opportunity to potentially double your money every six years.
It could take longer, but then again it can also happen faster!
And right now, we are seeing solid 12% compound yields.
As long as that keeps up, there's your money doubled in six years.