When we hear the term “millionaire”, it’s easy to conjure up images of the national elite. But believe it or not, there are actually millions of millionaires in the country, and it’s not because they’ve all inherited huge fortunes or held top jobs. Often, accumulating wealth is a simple matter of profiting from compounding.
Compound interest is a reward for investing your money. When your money earns interest, that interest is added to your total account value so that when future interest accrues, you get interest on the interest you’ve already earned. It might sound confusing (especially considering how many times we’ve just used the word “interest”), but in its most simplified sense, compound interest is interest on top of interest – and it’s is what makes your savings grow. There are many options for earning compound interest, but if you want to know what it takes to double your money, we have a calculator that uses the rule of 72 to arrive at an instant answer.
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The Rule of 72
The Rule of 72 is an easy way to determine how long it will take for your investment to double based on a fixed rate of return. To use the rule, simply divide 72 by your expected annual return (or your average annual return).
Imagine you have a portfolio rich in stocks. It’s fair to assume that your investments will give you an annual rate of return of 8%, because that’s actually a bit below the historical stock market average. So if we divide 72 by 8%, we get a nine-year window to double our money.
Although the rule of 72 is a fairly simple concept, it is useful to play around with different investment scenarios to see how long it will take to double the value of your portfolio, and to that end we have a tool that can help you. to help :
* The calculator is for estimation purposes only and does not constitute financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data available to it, and should not be relied upon as a substitute for a financial advisor or tax specialist.
To use this tool, simply enter your portfolio value, your expected return and your marginal tax bracket. From there, our calculator will tell you how long it will take you to double the value of your investments.
One thing to keep in mind is that if you’re investing with a tax-advantaged retirement account, like an IRA or 401(k), your marginal tax bracket is actually irrelevant. This is because these accounts are not subject to income tax year after year. Now, if you’re using this tool and you’re not saving with a tax-advantaged account, you’ll need to include your marginal tax rate. Otherwise, you can leave this number at 0%.
Start early, save big
Funding can be your best friend when it comes to retirement savings, especially if you start putting money aside early in your career. The longer you give your money to grow, the bigger the nest egg you have to build.
But don’t take our word for it. Check out the following table, which shows what your savings could be depending on when you started:
|
If you start saving $200 a month at age… |
This is what you will have at 65 |
|---|---|
|
25 |
$622,000 |
|
30 |
$413,000 |
|
35 |
$272,000 |
|
40 |
$175,000 |
|
45 |
$110,000 |
CHART BY AUTHOR. ASSUMES AN AVERAGE ANNUAL RETURN OF 8%.
As you can see, giving yourself 40 solid years to save allows you to take $96,000 in base contributions and grow it to $622,000. That’s a gain of $526,000. But the longer you wait to start saving and investing, the less opportunity you’ll have to take advantage of compounding.
Choose your investment wisely
One last thing to keep in mind about investing is that the more you are able to generate a high return, the sooner you will double your money. While stocks are certainly not the safest investments, they have historically provided some of the highest returns. When considering how to invest your savings, be sure to weigh the risks involved against the potential benefit. Bonds, for example, are generally a much less volatile choice, but they might only provide half the return of an equity-focused portfolio (if that’s the case).
Seeing what it takes to make your money grow can help you make smart savings and investment decisions. It pays to run through different scenarios and see how much wealth you could withdraw if you play your cards right.
