- Posted by admin
- On July 6, 2017
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- Futures Index Trading, IndexTrader Advanced, learn to trade, Stockmarket for Beginners, Trading Rules
So just how long does it take to double your money? It can take around 10 years if you invest in stocks based on a historical average return of 7 percent or 72 years if it goes into a savings account.
So what is the 72 Rule? 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.
Years required to double investment = 72 ÷ compound annual interest rate.
The long-term average return of the Standard and Poor’s 500 Index is about 10% per year from 1928 to 2014. For example, $1 invested at 10% takes 7.2 years (72 divided by 10) to turn into $2.
Now, several years ago Warren Buffett (in the aftermath of the financial crisis), said that investors should expect a return of 6% to 7% a year. Applying 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 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 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.
SPECIAL NOTE: Adjusting For Higher Rates
The rule of 72 is reasonably accurate for interest rates between 6% and 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%. So for 11% annual compounding interest, the rule of 73 is more appropriate; for 14%, it would be the rule of 74; for 5%, the rule of 71.