How do you know if you’ve got your money in the right savings or investment vehicle? You might want to ask yourself how long it will take your money to double, based on the interest rates you’re currently receiving”and there’s a formula that makes this calculation really easy.
As Rule of 72 to estimate how long it will take for your savings or investments to double, assuming a steady rate of return:
The formula is simple: 72 / interest rate = years to double
Try plugging in various interest rates from the different accounts your money is in, from savings and money market accounts to index and mutual funds. For example, if your account earns:
1%, it will take 72 years for your money to double (72 / 1 = 72)
3%, it will take 24 years for your money to double (72 / 3 = 24)
6%, it will take 12 years for your money to double (72 / 6 = 12)
9%, it will take 8 years for your money to double (72 / 9 = 8)
12%, it will take 6 years for your money to double (72 / 12 = 6)
My Capital One 360 savings account, for example, earns 0.63% APY. Using the Rule of 72, it will take 114 years for my money to double based on interest alone. This does not include any additional contributions to the savings account, of course; I could double the amount in my savings account by depositing more money over time, but it will take 114 years for my money to double via the so-called “magic of compound interest.”
My Vanguard investment accounts, on the other hand, earn a combined 10.3% rate of return. The Rule of 72 suggests that my money could double in 7 years, although that’s only if the market maintains a 10.3% rate of return during that period. My money could double more quickly”or more slowly”depending on what actually happens.
What the Rule of 72 really reveals, of course, is the power of finding savings vehicles with the highest potential for growth. Yes, it can be risky to put your money in the stock market”even in low-cost index funds”but leaving your money in a savings account comes with its own risks. When I opened my savings account in 2010, it offered 1.10% APY; a decade later, the interest rate is nearly half that.
The Rule of 72 also reminds us of the power of a single percentage point. If you have the choice between putting your money into a savings account with a 1% APY vs. a similar account with a 2% APY, well… that’s like asking yourself whether you’d like your money to double in 72 years or 36.
So run the numbers, and ask yourself if it might be time to start looking for a better place to save your money. In my case, I need to figure out how to turn my Capital One 360 savings account into a Capital One 360 Performance savings account, which is currently offering 1.70% APY”and could double my money in just 42 years.
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