20 Mar 2015 How Long Will It Take To Double Your Money?
Have you seen how much movie tickets cost these days? Expensive enough that when I went to the movies last week, I felt very acutely what behavioral economists call the “pain of paying.” Ouch. As I handed my credit card to the cashier inside the plastic bubble, I wondered, “How much will these things cost in 24 years?”
McDonalds menu in 1972.
Why 24 years specifically? Why not some round number like 15 or 20?
The reason I wondered about 24 years is because of a simple calculation I learned in one of my college economics classes. It’s called the Rule of 72. The Rule of 72 simply states that you can divide the number 72 by a chosen interest rate, and it will tell you approximately how many years it will take for something’s value (an item’s price or an investment’s value) to double. Therefore, assuming a 3% inflation rate, the Rule of 72 says that in 24 years (72/3%), movie ticket prices will be double what they are now (talk about the pain of paying).
Back at my desk the following Monday, I was reminded of my weekend experience at the movie theater, and I started thinking about the actual formula behind the Rule of 72. 72/x = y. In that formula, the constant value is the number 72. Our variables are the number of years (y) and the interest rate (x).
Let’s apply the formula to you–assuming no contributions or withdrawals, how long will it take for the value of your portfolio to double? Well, that depends on the rate of return you assume. A $400k portfolio will grow to $800k in approximately 11 years at 6.5% or 9 years at 8%. In this example, increasing your rate of return by 1.5% decreases the time it takes for your portfolio to double by 2 years.
Now, doubling your money may not be one of the things on your bucket list, but I would imagine some of the things that are on the list require money. Retiring early, a family trip to Europe, starting a new business perhaps, leaving a legacy gift. Given enough time, even a bank CD will double in value, but since time is so precious, how can we make our money double more quickly? The answer is easy: increase our rate of return. Its implementation is not.
What are some ways we can increase our return? I can think of a few:
We could add more stock exposure to our portfolios. However, this comes at the cost of more volatility, sleepless nights for some and the potential that we’ll bail out of our portfolios at the wrong time.
Or we could try to pick the next Apple and invest in it. But aren’t our lifetime dreams and plans too important to rely on gambling? Click here if you’re still wondering.
Fortunately we have other options that will allow us to sleep better at night and plan with more confidence . What if we were to invest as tax and cost efficiently as possible so that more of our wealth is kept? By creating a plan and investing in a highly diversified portfolio of low cost ETFs we can put Wall Street to work for us in the long run and keep more of our return without gambling on what the next hot stock may be or taking unneeded risk along the way.
Are you wondering if your portfolio is tax and cost efficient? Let us know, we can help.
