Investing your money for a solid gain or return is always the goal when deploying capital. But how to double your money? Investing with the goal of doubling your money has a number of important variables such as risk, rate of return and duration of the time required. We’ll look at a few different ways to attempt to double your money and provide insight into what kind of returns you might expect for various investments, and how long such returns would take to double the initial investment. First, let’s jump into three ways for learning how to double your money.
How to double your money using the rule of 72
What is the rule of 72? The rule of 72 is a simple method for determining how long it will take to double your money in an investment assuming a fixed annual rate of return. You calculate the length of time by dividing 72 by the annual rate of return. This will give you a rough estimate of how many years it will take the money you put into the investment to double.
Let’s look at an example of using the rule of 72. If you invest $10,000 and know you will get a 6% return every year on the investment, then you can use the rule of 72 to determine how long it will take to double your money. To do this, calculate years = 72 / 6. This gives you 12. At a 6% rate of return, it will take roughly 12 years to double your money. Note that the rule of 72 simply gives you an estimate. The rule of 72 also assumes compounding annually.
We can do one more example to show how you can do a similar calculation but this time you want to know what rate of return is required to double your money in 8 years. To do this, we would use the equation of 8 years = 72 / r. We solve for r by multiplying both sides by r to get 8 * r = 72. Then, we can divide both sides by 8 and we get r = 72 / 8 = 9. To double our money in 8 years, we need a 9% rate of return.
Let’s look at a chart of various doubling durations using the rule of 72:
So how can you use the rule of 72 process to double your money. Well, the rule of 72 gives you a framework in which to operate and understand the relationship between rate of return and how long it takes to double your investment. While it can be easy to look at the above chart and get excited about how a 20% rate of return can double your money every 3.6 years, it’s important to recognize that a 20% rate of return every year is not typical and is in fact quite rare. The rule of 72 chart above can help you set your expectations appropriately.
Also, with investing, the larger returns you’re aiming for typically involves taking on more risk. While you might achieve multiple years of high returns, there is also the potential for a year there with a drawdown that completely eliminates the path towards doubling your money on schedule. To expand upon this conversation, towards the end of this article we talk about average stock market returns as well as the mathematics of loss. This will help further explain the concept of market return expectations and what a drawdown does to your overall returns over time.
So, using the rule of 72, you can gauge a range of investment options according to what sort of risk you want to embrace and then analyze how long it will take to double your money. For instance, on the conservative risk side, you might put your cash into a CD that is paying 2%. This money is guaranteed by the bank typically so there is zero risk. But, of course, a 2% rate of return means it will take 36 years to double your money. Yikes!
You might take on a bit more risk through some investment grade bonds. Let’s say these have averaged 4% returns in recent years. While there is some risk of default, by and large, these are pretty safe investments. Assuming 4% returns, it’s going to take 18 years to double your money.
Lastly, maybe you want to buy into a broad stock market index like an S&P 500 index ETF. If you assume 7% returns maybe, then it’s going to take you a little over 10 years to double your money. More on average stock market returns a little later.
How to double your money using the free money boost of a 401(k)
One of the most powerful wealth building tools that individuals can use to double your money quickly or simple grow your net worth over time is the 401(k) and the subsequent matching and employer contributions that can come with it. 401(k) plans are retirement saving vehicles associated with being employed in a company. By participating in your employer’s 401(k) plan, you can save pre-tax money towards your retirement. Not only is there an immediate return on this contribution based on the taxes saved (the money you contribute pre-tax is money that does not get taxes, so you are paying less in taxes by saving money essentially), but the immediate return can be even more impactful as a result of a company matching element.
Often times companies will not only let you contribute pre-tax money into a 401(k), but they will contribute some money on their end as well. The most common way this is done is through a company match. A match can work a few different ways, but a simple version goes like this: A company will match every 1% contribution into your 401(k) up to 4%. So, if you put in 3%, the company will also put in 3%. If you put in 5%, the company will put in 4% (the match goes up to 4%). Now, if you haven’t figured this out yet, you essentially just doubled your money already! By investing 4% of your paycheck, you already grew that money to two times that amount, or you might say you already doubled your money.
Now that this has been explained, you might think about how crazy it is when employees don’t participate in 401(k) plans and get the free money of the match. No matter how stretched you are financially (some people don’t want money taken out of their paychecks and going towards a 401(k)), you simply must do whatever it takes to get the maximum company match in your 401(k) plan. If not, you are literally saying no to free money.
Another common method of doing a match might be that a company matches 50% of your contributions up to a certain level. A previous company I worked for had a 401(k) where they matched half of my contributions up to 6%. So if I contributed 6% of my paycheck, they added another 3%. It’s still a great deal and a must for participation.
Additionally, some small businesses due to 401(k) regulations might do a different type of employer contribution that is different from a traditional matching setup. Some 401(k)s will have a “non-elective” contribution from the employer into your 401(k). Often times this can be 3%. How this works is that no matter what the employee does (contributes nothing or something), they will get 3% from the employer every time. This is also a great deal for employees!
Lastly, some employers will also add a profit sharing component to 401(k) plans which is more “free money” on top of the typical contributions, so make sure to look into your specific plan to make sure you’re participating to the level required to get profit sharing and any matching. This is a huge way to build wealth!
Let’s look at a brief example of how 401(k) matching can have an impact on the wealth you are building. In this example, this person has a salary of $75,000 and has a 401(k) plan where the company matches 100% up to 4% contributions. Let’s also assume a relatively conservative 6% rate of return on investments. Let’s also assume 3% raises in salary each year.
The above chart shows the progression of 401(k) balances in both scenarios with a company match and without a company match. The differences are profound! Here’s another look at the differences over the 30 year time frame:
As you can see, taking advantage of 401(k) matching can be a huge contributor to your wealth and the benefits only get larger over time.
Does your company not offer a 401(k)? Talk to management about providing that option. With the newer 401(k) options out there now that are lower cost, it’s easier than ever for companies to provide 401(k) benefits to their employees. Here’s a recent review we did on Guideline which is a great option for small businesses.
How to double your money using dividend reinvestment
Dividend investing is a popular form of investing because of the steady, reliable and increasing cash flows that are paid on an ongoing basis. Dividend stocks provide investors a way to realize a return without having to sell the stock. It also allows investors to gain a return in multiple ways rather than relying solely on buying something and selling it for a higher price. Ideally, dividend investors get both cash flows in the dividend payments and capital appreciation (the stock rising in price) at the same time.
Now the power of dividend investing truly comes alive when dividend reinvestment is kicked in. Like the power of compounding interest, dividend reinvesting means repeatedly plowing cash flows back into the investment to regularly “double down” and go for maximum overall growth of the position and maximum overall return over time.
While in the past, investors often relied on dividend reinvestment plans (often called DRIPs in the past) to build dividend reinvestment positions in single stocks, nowadays most major brokerages offer dividend reinvestment options on all stocks and even ETFs and funds (when you own an S&P 500 index fund, it generates a dividend based on the collective dividend payments of the components inside the index). So, dividend reinvesting is extremely easy at any major online brokerage these days.
Let’s look at an example where a stock is paying a dividend. In one scenario, the dividend is reinvested and in the other the dividend is not. Let’s examine the difference in where you end up as well as how long it takes to double your money. In this example, we’ll look at a $10,000 starting position in a stock that pays a 3% annual dividend.
A few things to note in the above chart. First, the obvious one, is that the ending balance on the reinvestment scenario is well over 2x the ending balance on the non-reinvestment scenario. Second, because of the growth of the position size, have a look at how big the dividend payments get compared to the first scenario. By year 30, the reinvested position is spitting out almost $3k in dividends compared to the just over $1200 in the other scenario. A major difference.
Next, you can look at the chart to see how long it takes to double your money in both scenarios. Without reinvesting dividends, it takes 16 years to double your money in this scenario. By reinvesting, it only takes 10 years. Again, a pretty significant difference.
The following chart further illustrates how the position size grows in both scenarios:
Now for the counter argument. Dividend investing can sometimes aim too much for dividends as opposed to total overall return. In one sense, we don’t care what form our returns take, we just want maximum returns. So, don’t get too overly obsessed with higher dividend stocks that are actually stocks that aren’t keeping up with the overall market in terms of total return.
With that said, let’s briefly talk about stock market returns and why this is an important topic to consider.
Stock Market Average Returns
Since 1928, the S&P 500 has returned on average about 7.5% a year and that does not include dividends. How much would dividends bump that up? Well, dividend yield on the major index before the 1980s was usually over 3%. In recent years it’s been just under 2%. So, even if you’re conservative and use the 2% number, you’re looking at a pretty healthy average return in equities over long periods of time.
As we know from our rule of 72 chart above, an 8% annual return will take about 9 years to double your money. So, for young investors who have time to wait out any volatility, in most scenarios you can consider something like a 9 year time horizon for doubling your money if you allocate your cash into a simple index fund that tracks the market. If you go more aggressive and bet on one or a handful of individual stocks, you might get there quicker or you might not get there at all. Average returns apply to the broad market, not individual stocks.
For any short-term goals (10 years or less), your main risk is sequence of returns risk. In a general sense, sequence of returns risk refers to the risk of allocating your money right before a bear market hits. For example, if your goal is to double your money within 7 or 8 years, it can severely harm your chances to hit the goal if you get a bear market right away.
Now for accumulation mode investors, sequences of returns risk isn’t a big deal in most scenarios because you’re simply just accumulating assets using dollar cost averaging over time. Where sequence of returns risk mostly comes into play is for retirees who are withdrawing on their money. For instance, if you retire and plan to withdraw 3% of your money and you’re feeling good about your scenario because the market usually averages 7-8%, you can risk your plan falling a part if you hit a bear market right away during your retirement years. The reason for this is because if you’re withdrawing on your money while your overall portfolio takes a large drawdown, you’re essentially permanently locking in your losses and even a subsequent raging bull market will not get you back into a health state where you won’t outlive your money.
Understanding the mathematics of loss can be helpful in understanding this dynamic as well. Mathematics of loss in investing usually refers to what gain is required to get back to even after a significant drawdown. Let’s say you have a $100,000 portfolio that suffers a 40% drawdown during a market crash. You’re now at $60,000. Well, to get back to even – back to $100,000 – you don’t need a 40% gain, you need more than that. To get from $60,000 to $100,000, you need a 66% gain in your portfolio. This demonstrates how damaging major volatility can be on your portfolio – especially in the scenario where sequences of returns risk is huge, that being the scenario where you are withdrawing money on your portfolio during a retirement phase of life.
So let’s circle back to our original question of how to double your money. We’ve outlined a few specific ways you might try to accomplish this, but the overall takeaway is that regular investing at regular intervals where you have the patience to let your money compound and ride through volatility will lead you to a place where you likely do much better than doubling your money. You can become extremely wealthy using the power of investing and the power of compounding.