Often people ask the question: “How long will it take to double my investment?” For instance, if you had an amount invested today, what would the length of time be to double that amount? And therefore allow you to get a glimpse of what it would be worth in the future.
It is impossible to give definite answers to these questions, however the Rule of 72 states that if we divide the number 72 by an investment’s net (after tax) annual rate of return, we will get the number of years it will take the investment to double in value.
How does it work?
- If you put $3,600 in an investment that returns an annual rate of 5%, it will be worth $7,200 in 14.4 years (72 divided by 5).
- If put $3,600 in an investment that returns an annual rate of 8%, it will be worth $7,200 in just 9 years (72 divided by 8).
The above example assumes that you reinvest all interest and return rather than getting the interest on the investment credited to your bank account.
No one can be exact at predicting the rate of return an investment is going to earn but you should be able to do a “guesstimate” by looking at a conservative average of say the last 5 or 7 years return of the investment. Then the Rule of 72 can provide a good guideline of how long it will take for your money to double.
How does Inflation affect this?
The Reserve Bank is tasked at keeping inflation between 1% and 3%. Inflation is the growth in prices. For example, a loaf of bread may be $2.00 today, but due to inflation (price rises) it may cost $4.00 in 30 years. This is important to note as your money in the future will have less value (buy less) than it does today.
The most important thing is to start saving as much as you can today. It is useful to get an idea of what our savings will be in time, however, we still need to keep an eye on them – how they are invested, can we add to them and if they are enough for what we need in the future? It is important to review your savings and investing strategies each year, no matter how small or large; how simple of complex they are.
The two best times to start saving are 10 years ago and today.