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
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.
How to double your money every 7 years? ›
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).
What is the 7 year rule for doubling money? ›
How the Rule of 72 Works. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.
What is the 7 year money rule? ›
Assuming long-term market returns stay more or less the same, the Rule of 72 tells us that you should be able to double your money every 7.2 years.
What is the doubling money trick? ›
There's actually a simple trick that allows you to quickly estimate when you can double your money. It's called the Rule of 72. The principle is simple. Divide 72 by the annual rate of return to figure how long it will take to double your money.
What is the 7 year rule for compound interest? ›
When does money double every seven years? To use the Rule of 72 to figure out when your money will double itself, all you need to know is the annual rate of expected return. If this is 10%, then you'll divide 72 by 10 (the expected rate of return) to get 7.2 years.
Does 401k balance 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 Rule 72 in savings? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
Does your net worth double every 7 years? ›
With that 10 percent average annual return, one can double their money in about seven years, Cramer said. "The magic of compounding works best the younger you are, because that means you have more time for your money to grow," Cramer said.
Can I double my money in 5 years? ›
As a rate of return, long-term mutual funds can offer rates between 12% and 15% per year. With these mutual funds, it may take between 5 and 6 years to double your money.
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
How to double money asap? ›
The time-tested way to double your money over a reasonable amount of time is to invest in a solid, balanced portfolio that's diversified between blue-chip stocks and investment-grade bonds.
What is the magic number to double your money? ›
Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.
Will my 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.
Is 7% annual return realistic? ›
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%. [Since we're talking citations in this post: Investopedia.]
How many years does a sum of money doubles itself in 7 years? ›
nm97 wrote: A sum of money doubles itself in 7 years. In how many years it becomes four fold? If the initial amount of money is x dollars, then 7 years later, it will be 2x dollars, and in another 7 years, it will be 4x dollars. Thus, it takes 14 years to quadruple the initial amount money.
How long does it take 100k to double? ›
By using the Rule of 72 formula, your calculation will look like this: 72/6 = 12. This tells you that, at a 6% annual rate of return, you can expect your investment to double in value — to be worth $100,000 — in roughly 12 years.
