Is the Rule of 72 Broken?
The Rule of 72 is often cited as the answer to the question “How long does it take to double your money?”
At 1%, the rule of 72 provides that it takes 72 years to double your money.
But is this really true?
If you’re only going to invest one-time and never again for the rest of your life, then this theory holds true.
More likely, however, you’re going to continually invest money over your lifetime.
A better formula to use
How much you’re able to put into your investment portfolio makes a huge difference.
This is dependent on how much you’re able to save.
As your total wealth grows, you need to invest more to double your money in the same length of time.
The formula is: Wealth savings rate = expected annual savings / total wealth
If you have $50,000 of assets invested, and plan to contribute $5,000, your wealth savings rate is 10%.
With a real return of 5% (which you can get by investing in a low-cost index fund), you can double your money in 5.8 years.
If you’ve got a wealth savings rate of 30% or higher, chances are you’ll double your money in the next couple of years or so.
The more wealth you have, the more you’ll need to contribute per year to double your capital at the same rate.
If there’s only 1 takeaway you can glean from this, it is:
Prioritise saving over chasing the highest returns, especially in the early stages.