How long does it take to double your money? You likely can have twice as much wealth in 10 years, if you invest it in stocks, or 72 years if it goes into a savings account. It pays to understand the math.
Everyone says you should invest because you’ll grow your money, but let’s back up a second and look at how it really works.
Stocks are one of many possible ways to invest your money. While the future is never guaranteed, history suggests that they have high potential returns. The long-term average return of the Standard and Poor’s 500 Index is about 10% per year from 1928 to 2014. Warren Buffett several years ago, in the aftermath of the financial crisis, said that investors should expect a return of 6% to 7% a year.
Keep in mind that these are long-term averages. The market can go down in one year, and you have to wait a couple of years for things to turn around. That’s why it’s best to invest money that you most likely don’t need for several years.
The likelihood of achieving high single- to double-digit annual percentage returns is why people invest in the stock market for their retirement. Beyond your emergency fund, why would you put money that you don’t plan on touching for 10, 20 or 30 years into savings accounts that can’t even keep up with inflation?
According to Bankrate, today’s average money market rate in America is 0.09%. With inflation rising at approximately 2% year over year, socking away your retirement money into a savings account means you’re actually losing money. (What’s even crazier, there are new ways of saving that earn no interest at all, such as this new app called Digit.)
Clearly, it’s better to invest than just letting your money sit in your savings account. If hearing 7% doesn’t get you excited, the prospect of doubling your money might.
The “rule of 72” is a simplified way to calculate how long an investment takes to double, given a fixed annual rate of interest. You divide 72 by the annual rate of return you receive on your investments, and that number is a rough estimate of years it takes to double your money.
For example, $1 invested at 10% takes 7.2 years (72 divided by 10) to turn into $2.
Now, apply this formula to Warren Buffett’s number. If you invested $10,000 at 7%, it takes about 10 years to turn into $20,000. What if you have your $10,000 in a savings account that (let’s be generous) yields 1% a year? It takes you 72 years. That’s a 60-year difference from investing in stocks.
The rule of 72 is just math, but it’s an extremely helpful rule of thumb to put the marathon of investing into perspective. Think through what you use your savings for, and make sure you use them in a way that allows your money to reach its full potential.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
This article originally appeared in AdviceIQ.
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