If you put your money in the right places, it can grow substantially over time, thanks to the power of compound interest. It could even double, while you don't have to do a thing.
Want to figure out just how fast your money could grow? The "Rule of 72" approximates how many years it will take for your money to double, given a fixed rate of return.
"Think about your savings for the future," Tom Mathews and Steve Siebold write in their book "How Money Works," which highlights the "Rule of 72" as of one of three essential personal finance topics to understand (the other two being compound interest and the time value of money). "The Rule of 72 can give you an idea of how many doubles you'll get in your lifetime. With more time, a lower interest rate may give you enough to nail your goals. With less time, you may need a higher interest rate."
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)
If your money sits in a standard savings account and earns just 0.09% (the average interest rate for savings accounts nationwide), it would take 800 years to double.
If you invest your money in the stock market, whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else, you'll likely see even bigger returns. The average annualized total return for the S&P 500 index over the past 90 years is 9.8%. Adjusted for inflation, it still comes to an annual return of around 7% to 8%. If you earn 7%, your money will double in a little over 10 years.
You can also use the Rule of 72 to plug in interest rates from credit card debt, a car loan, home mortgage, or student loan to figure out how many years it'll take your money to double for someone else.
For example, the average interest rate for credit cards is 17.3%. If you divide 72 by that rate, you get 4.16 years. That's all it takes for a credit card company to earn double your money. The higher the interest rate, the more you'll owe to your lenders.
If you have debt, look into the possibility of refinancing your car loan or mortgage to get a lower interest rate.
The "Rule of 72" is "a practical eye opener that forces you to ask shrewd questions before making important money decisions," Mathews and Siebold write. If you understand and apply it to your personal finances, "you're less likely to fall for gimmicky promotions from banks, settle for opportunities that don't give you the advantage, and take on debt that might take forever to pay off."
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