How Long Will It Take to Double My Money?
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.
Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.
With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.
But just how quickly does your money grow? The easiest way to work that out is by using what’s known as the “Rule of 72.”1Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you’ve invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.
For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.