When Will Your Investment Double?
The Rule of 72 is one way of determining how long it may take for an investment to double in size, given a fixed annual compound interest rate of between 6-10%. Unfortunately, this rule is less effective for compounding interest rates lower than 6% and higher than 10%.
To use the Rule of 72, divide 72 by your interest rate. Using the Rule of 72 you can determine that if you make a one-time investment of $7,500 today at an annual growth rate of 7.2%, that principal amount will potentially grow to $15,000 in 10 years, $30,000 in 20 years and so on.
While the Rule of 72 is a reasonably accurate shortcut for estimating growth rates that fall between 6% and 10%, it’s not perfect. It’s a useful shortcut that can help you quickly compare and contrast the power of different annual interest rates when deciding how to invest.
Using Compound Interest
As an investor, compound interest is one of your greatest tools. It’s the interest on a deposit (or loan) that’s calculated based on both the initial principal and the accumulated interest from the previous periods.
But not all compounding interests are the same. To understand how much you’ll earn from an investment with compounding interest, you have to consider the interest rate and the frequency of the compound interest. An investment that has a rate of 5% and compounds semi-annually will earn you more than an investment that has a rate of 10% and compounds annually.
Compound interest grows at an ever-accelerating rate. The more you invest initially, the more interest you will earn and the more your compound interest will work for you. The funds and money you earn on a compound interest are taxable unless the money is in a tax-sheltered account.
For help calculating accurate earnings growth rates, set up an appointment to discuss strategies for pursuing your long-term retirement savings goals.
The importance of saving for retirement isn’t a lesson often taught in school. People tend to focus on more tangible goals to save for, like a first car or a house, and put off saving for retirement for as long as possible. What some people don’t realize is that the best time to start saving for your retirement is now!
There are two big reasons why it’s important to start saving for retirement as early as you can – making the most of compound interest and creating good saving habits.
Make the Most of Compound Interest
Depending on the compound interest of your retirement savings account, those who start saving earlier can reap greater benefits through their compound interest.
But let us show you a real example. Let’s say that you have a Roth IRA that earns compound interest of 7% in average annual returns, and you make the maximum contributions to that account every year ($6,000). After ten years, you will have $83,095. If you make the same contributions to a regular savings account with no interest, you would have $60,000. The longer you’re using compound interest to grow your retirement savings, the more earning potential you have.
Making Saving a Habit
If you decide to put off saving for retirement, getting into the habit of saving can be a challenge. But if you build saving for retirement into your budget from the moment you start earning money, the easier it will be to continue that habit for as long as you need.
Even if you’re in a position where you can’t make the maximum contributions to a 401(k) or an IRA, save every penny you can. Then, when you can, get serious about maxing out your yearly contributions and take advantage of any employer-based retirement accounts. This can add to what you’re already saving and serve you in the long run.
Make saving for retirement second nature and start making compound interest work for you. The earlier you start saving, the sooner your retirement fund can reach its full potential. If you don’t have a retirement fund and want to learn more about saving your way to retirement, contact the office.
This material was developed and prepared by a third party for use by your Registered Representative. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The content is developed from sources believed to be providing accurate information.
The rule of 72 is a mathematical concept and does not guarantee investment results or function as a predictor of how your investments will perform. It is simply an approximation of the impact a targeted rate of return would have. Investments are subject to fluctuating returns and there can never be a guarantee that any investment will double in value.
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