Have you ever asked yourself how long it would take to double your money if you left it invested, untouched, somewhere? There’s a clever, and easy way to find out.
Of course, it depends on the rate of return you would be getting. If you were earning 10% a year, would it take approximately ten years? No, actually it would only take seven because of the compound return – you’d be making gains on returns from previous years. If you wanted to see your money double in ten years, you’d only need a steady return of 7%.
Once you know the rate of return you’ll receive (or can make a reasonable assumption), there is actually a simple way of working out how long it would take to double your money – it’s called the ‘Rule of 72’. You take the number 72, divide it by your annual estimated (or desired) rate of return, and voila! You have the approximate number of years it will take to double your money.
So, let’s use a more realistic rate of growth as an example. Let’s say you want to put your £20,000 annual ISA allowance away, and think that you will always be able to find an interest rate of 3% in a fixed term account or bond. 72 divided by 3 equals 24; that’s 24 years to double your money. If you invested in a managed fund and reasonably expected a 5% rate of return, that’s 72 divided by 5 equals 14.4; just over 14 years to double your money.
This helps demonstrate that the earlier you start to save, the more you’ll benefit from compounded growth on your returns. Using the above example with a rate of return of 5%, if you put £20,000 into a stocks and shares ISA at the age of 30 it would double before your 45th birthday, and would double again before you turn 60. That would be £80,000 from an original £20,000 investment.
But always remember – for most investments the value can go down as well as up, and you may get back less than you invested. Financial advice is always recommended when investing.
For more information on how compound interest works, we’ve covered Albert Einstein’s thinking of The Compounding Effect previously.