How to Double Your Savings: The Rule of 72

  

 The article posted last week titled “Combating Inflation with Compound interest” describes how inflation impacts the value of the money in our savings accounts and how compound interest can help reduce that. The article explains that investing your money in an account with compound interest would double the amount money made over time because you are taking advantage of the interest you earn along the way and on money you deposited. 

    Taking advantage of compound interest is a great way to increase the value of your money over time. It allows you to account for changes in inflation rates and potentially double your initial investment. According to the book “How Money Works: Stop being a sucker” by Tom Mathews, Steve Siebold, and Andy Horner a typical savings account is likely to have an interest rate under 1%. The same book provides a mathematical formula to help calculate how much time it would take to double the money you have invested based on your interest rate. 

The formula is as follows ((Mathews et al., 2023 p. 62):

72 ÷ interest rate = years to double 

This formula will give you a rough estimate on how long it would take to double the money invested. For example if you invested in an account with 6% interest, it would take 12 years double what you have invested. This formula allows you to more accurately plan your future because if you know how much it will cost-you can calculate how much you need to invest right now, at what interest rate, and how long it will take to get there. 

The book “How Money Works: Stop being a sucker” provides three valid reasons why someone may keep their money in a low interest savings account (Mathews et al., 2023, p. 61): 

1. They want their money to be safe 
2. They want to be able to access their money easily 
3. They believe their money is still growing 

If you have a typical savings account with an interest rate of 1%, it would take 72 years to double your money. Yes, money in a conventional savings account does grow over time, but if you put in $1500 it would take 72 years for that to become $2500. This is based on the assumption that you do not have an emergency that requires you to take money out before 72 years. While this money is easier to access; in order to double the money you would need to avoid touching your savings to keep it growing.

There is risk associated with investing money and the decision to keep your money in a low interest account provides a sense of security in the present but does not provide a strong foundation for your future. 

You may feel that you can't contribute enough money into your low interest savings account right now because you are in school or a unique financial situation but you have plans to make more money in a few years and can make up whatever money you need for your future. But why wait?

According to this formula:

72 ÷ interest rate = years to double 

At 6%, it would take you 12 years to double your money 

At 9% it would take you 8 years to double your money 

At 12% it would take you 6 years to double your money

If you are 18 and invest 2,500 at 12%, you’d have 5,000 if your account by the time you are 24

How long will it take to build your future if you started today?

Check out “How Money Works-Stop Being a Sucker” by Tom Mathews, Steve Siebold, and Andy Horner for more information on how to improve your financial education.

Works Cited

Mathews, T., Siebold, S., Horner, A. (2023). How Money Works-Stop Being a Sucker. Hammerheads Publishing.