How Long Does it Take to Double Your Money?
At first glance, a 7% return on your investment may not seem that impressive. Yet what if you heard that your money could double in roughly 10 years? The graphic below takes the rule of 72 shortcut and uses the more precise logarithmic formula to show how long it takes to grow your money at different annualized returns.
Why it Pays to Know the Math
Using the classic rule of 72, an investor can estimate how long it takes to double their money. At 7% annual returns, an investor would see $10,000 grow to $20,000 in about a decade by taking 72 and dividing it by 7%, the rate of return.
While the rule of 72 serves as a guide to estimating when your money will double, the more accurate way to arrive at this number is through a logarithmic equation. In short, it divides the natural log of 2 by the natural log of 1 and adds this to the rate of return.
Consider if an investor puts their money in the S&P 500. Historically, it has averaged 11.5% returns between 1928 and 2022. In 6.4 years, their money would double, assuming these average returns. If they were to put this money in a savings account, where the average savings rate is 0.6%, it would take 120 more years for their money to reach this potential. In real terms, which takes inflation into account, an investor would see their money lose value if they parked it in a savings account. Historically, inflation has averaged 3.3% over the last century.
From the graphic above, we can see that 3-month T-Bills, often considered among the safest assets, doubled about every 21 years. Often, investors consider this a place to put cash that is low-risk and highly liquid.
Interestingly, real estate assets had returns of 4.4%, doubling roughly every 16 years. Between 1928 and 2022, the value of $100 invested in real estate assets would be worth $5,121.52. By contrast, the value of $100 invested in the S&P 500, including reinvested dividends, would have reached over $624,000.
In conclusion, understanding the dynamics of how your money grows and the factors that influence it can be a game-changer in your financial journey. While the rule of 72 serves as a useful tool for quick estimations, it's the more precise logarithmic equation that truly paints a clearer picture of how different rates of return can shape your financial future. Whether you're aiming for the steady growth of T-Bills or the substantial returns of the S&P 500, knowing how long it takes to double your money empowers you to make informed decisions that align with your goals.
Knowing the math behind investment growth can make a world of difference. By harnessing the power of compounding and considering historical asset returns, investors can better chart their financial course and make choices that align with their objectives.
For the full article and more information, check out the source: https://advisor.visualcapitalist.com/how-long-does-it-take-to-double-your-money/