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
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).
Can I double my money in 7 years? ›
All you do is divide 72 by the fixed rate of return to get the number of years it will take for your initial investment to double. You would need to earn 10% per year to double your money in a little over seven years.
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.
What is the rule of 7 doubling? ›
Divide 72 by your average expected annual return
If instead your average expected annual return was a more modest 7% (accounting for the typical annual inflation of around 3%), dividing 72 by 7 would result in 10.3, meaning it would take slightly over a decade for your money to double under those conditions.
What is the rule for money doubles every 7 years? ›
The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure. For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you'll need to achieve that goal.
What is the 7 year rule in investing? ›
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).
How to double $2000 dollars in 24 hours? ›
The Best Ways To Double Money In 24 Hours
- Flip Stuff For Profit.
- Start A Retail Arbitrage Business.
- Invest In Real Estate.
- Play Games For Money.
- Invest In Dividend Stocks & ETFs.
- Use Crypto Interest Accounts.
- Start A Side Hustle.
- Invest In Your 401(k)
“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.
Is a 7% return realistic? ›
While quite a few personal finance pundits have suggested that a stock investor can expect a 12% annual return, when you incorporate the impact of volatility and inflation, 7% is a more accurate historical estimate for an aggressive investor (someone primarily invested in stocks), and 5% would be more appropriate for ...
What is the 5 year rule for 401k? ›
Contributions and earnings in a Roth 401(k) can be withdrawn without paying taxes and penalties if you are at least 59½ and had your account for at least five years. Withdrawals can be made without penalty if you become disabled or by a beneficiary after your death.
In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period (usually years) to obtain the approximate number of periods required for doubling.
What is the rule of 70 years? ›
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.
What is the doubling rule of 69? ›
Rule of 69 is a general rule to estimate the time that is required to make the investment to be doubled, keeping the interest rate as a continuous compounding interest rate, i.e., the interest rate is compounding every moment.
What to do with $40,000? ›
Alright, let's move onto how to invest $40,000!
- Stocks & ETFs. One of the most straightforward ways to invest 40,000 dollars is to invest in stocks and exchange-traded funds (ETFs.) ...
- Real Estate. ...
- Use A Robo-Advisor. ...
- Alternative Investments. ...
- Fixed-Income Investments. ...
- Cryptocurrency. ...
- Paying Off Debt. ...
- Your Education.
The 7 Percent Rule is a foundational guideline for retirees, suggesting that they should only withdraw upto 7% of their initial retirement savings every year to cover living expenses. This strategy is often associated with the “4% Rule,” which suggests a 4% withdrawal rate.
How long does it take to 10x your money? ›
A one-time investment can more than 10x in value in 25 years averaging 10% annual returns, thanks to compounding. Most people won't bank on a one-time investment to set them up in retirement, but it shows the heavy lifting that time can do.
How many years does a sum of money doubles itself in 7 years? ›
The correct Answer is:21
Step by step video, text & image solution for A sum of money doubles itself in 7 years. In how many years it will become 4 times ? by Maths experts to help you in doubts & scoring excellent marks in Class 14 exams.
How long does it take to double your money with a 7% return? ›
Why it Pays to Know the Math
| Rate of Return | Rule of 72 # of Years to Double Money | Logarithmic Formula # of Years to Double Money |
|---|
| 5% | 14.4 | 14.2 |
| 6% | 12.0 | 11.9 |
| 7% | 10.3 | 10.2 |
| 8% | 9.0 | 9.0 |
15 more rowsSep 14, 2023
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%.
Does the S&P 500 double every 7 years? ›
How long has it historically taken a stock investment to double? NYU business professor Aswath Damodaran has done the math. According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time.
