Do you know how long it will take your money in an investment or savings account to double? It might have never occurred to you to even wonder. But a simple equation could help you determine if your money is in the right place based on your financial goals.
It’s called the rule of 72. All you do is divide 72 by the interest rate for your savings account (or the anticipated rate of return for your investing vehicle). If the interest rate on your high-yield savings account is 1 percent, it’ll take—no surprise here—seventy-two years for your money to double. If your interest rate is 2 percent, it’ll take thirty-six years for your money to double. A 10 percent return rate on an index fund—maybe the markets are having a great couple of years—will require a little over seven years for your money to double.
You should not use the rule of 72 to feel bad about how slow it may feel your money is growing. What you should use it for instead is to motivate you to make sure your money is in the right place at the right time. If the interest rate for your savings account drops below 1 percent, and you see lots of other banks offering 2 or 3 percent, moving over to a competitor could dramatically reduce the amount of time it takes for your money to accrue interest. Or, the rule of 72 could be a reminder not to hoard too much money in a liquid savings account when you could be earning so much more by investing it.