When it comes to investing a majority of people are unable to answer the following question. How long will it take for your investment to double in value?
The answer to this question will require some math, but hang in there because we will keep it simple. The main factor that affects how long it will take for your money to double is your rate of return. There is a simple rule to help you estimate the time required for your money to double, the "Rule of 72".
Using the rule and your rate of return you can estimate how long it will take your money to double. All you have to do is divide 72 by your rate of return. For example, if your rate of return is 7.2% then you would take 72 divided by 7.2. (72 / 7.2 = 10) So, if you are receiving a 7.2% rate of return your money would double in 10 years.
Along with your rate of return, the second important factor is how long you can have your money invested. This is why starting earlier is so important. Lets look at a couple of examples to compare how time will affect your ability to build wealth. We will look at a 20 year old versus a 40 year old making a one time $1,000 investment drawing 7.2 percent. We will look at what there investment will be worth at age 60. Using the "Rule of 72" their money will double every 10 years.
AGE20 year old40 year old
20 $1,000
30 $2,000
40 $4,000 $1,000
50 $8,000 $2,000
60 $16,000 $4,000
This is why investing earlier is so important. You could have invested the same amount of money, but ended up with four times the wealth by starting out earlier!
In my experience most people have some fear of investing in the stock market. I think most people's fear relates to the risk of losing their money. What is not understood is that keeping money in a savings account drawing 0.5 percent is also losing money. It would take 144 years for your money to double in that savings account. If an individual invests properly by diversifying their investment they will limit their risks of losing money. This can be done by investing in several different companies or buying exchange traded funds (etfs) that spread your investment across many companies. An example would be VOO, which tracks the S&P 500, a group of over 500 companies. When investing for an extended amount of time there will most likely be times that investments lose money, but as history has shown the market typically recovers. The key is to look at the big picture and not to sell during the down swings. Staying the course and even adding during down times has shown throughout history to be the best bet!
