How long does it take to double your money? That is a fairly common question that many people have when they think of saving or investing. When investing, you will also have the potential of an increase or decrease in your capital base. And when saving, if done properly, you will have the risks associated with interest rates and not necessarily the loss of capital. But for this post, we are strictly looking at how the interest rate will affect the time frame to double your money.
Known as the Rule of 72, this is an easy way to estimate the time it will take for an investment or savings account to double. How this works is you divide 72 by the interest rate you are set to receive from the investment. So, if you were lucky in today’s market to find a solid investment that earned 10%, it would take approximately 7.2 years to double. 72 divided by ten is 7.2 years. With me so far? Now we will examine some real-life examples as of November 11, 2020.
Treasuries
Let’s start with a safe investment that most people are aware of, a 10-year Treasury. As of the morning of November 11th, they paid an interest rate of 0.958%. Applying the Rule of 72 and dividing it means that a 10-year Treasury will take approximately 75 years to double your money. While safe, not exactly a ringing endorsement to rush out and buy Treasuries if you want to grow your capital. Now the Treasury doe sells various bills and bonds that all have different maturities and interest rates and even have some investments that will protect you from inflation. To learn more about what the Treasury offers and to buy and of their instruments, visit https://www.treasurydirect.gov/.
Certificate of Deposits
Want something that pays more than a Treasury and is still 100% guaranteed and safe for your capital? Then you will want to consider an FDIC insured certificate of deposit or CD from a member bank. Unlike a Treasury, these do have some risk exposure to you if you invest more than $250,000 in a single bank, though there are some variations on this protection depending on the types of account you have. But for the ease of things, remember that the FDIC will insure your deposit up to the $250,000 limit.
According to www.bankrate.com the best paying 5-year CD on November 11 will pay 1.35%, meaning that if you divide 72 by that 1.35, it will take approximately 53 years to double. Not a lot better, but it does shave 22 years off the process. This means you may wish to look at something with additional risk to provide you with a return that at least outpaces the historical inflation of about 3%.
Bonds
When you invest in a bond, you are loaning a company or government money to exchange an interest payment. Now, there are three main types of bonds available: national government bonds such as US Treasuries or that of another national government such as Canada or Japan. These bonds are backed by the faith of the government and paid with the proceeds of tax revenue. Not all governments are created equally as the US has never defaulted on an issued bond while Russia and many other developing countries have defaulted on their debts. So, please do your research on the bond and the country issuing it.
Then, municipal bonds are issued by states, cities, and counties that pay a little more in interest than a national bond. Here, there are two basic types, and they are general obligation and revenue bonds. With a general obligation bond, it is repaid with the taxing authority of the issuing government. In a revenue bond, they are repaid with the proceeds of a specific project such as toll revenue or an airport. Municipal bonds have been known to default on their payments, so you will want to perform even more homework with these types.
All bonds are rated by one of the three main rating companies for creditworthiness on a note here. While not an issue with a US Treasury, it would be on all others. The higher the risk of default, the more interest they will pay to offset that risk.
Then you have private corporate bonds issued by companies. These bonds come in a wide variety of credit risks ranging from that as good as the US government to what is considered junk, meaning it may already be in default. Bonds are generally sold for a minimum of $1,000, but that is not what we will look at next. Here we will look at a secured bond, meaning that your investment is collateralized by property that is to be liquidated to repay the bondholder in the event of default. As you are aware by now, I am a fan of these bonds and particularly Worthy Bonds that pay a daily compounded 5%. This means that with the Rule of 72, a Worthy Bond will double in a little over 14 years. To learn more about Worthy Bonds and earn each of us a free $10 bond, visit https://worthybonds.com/?r=Fldji.
Stocks
Stocks or equities are considered the riskiest of these investments, but they are not much riskier than a corporate bond when viewed with a long-term approach. As a corporate bond, there is a chance that you may lose capital in such an investment, but unlike the previous choice’s stocks can appreciate. However, we will not be looking at that aspect of these investment tools and instead look at a single stock’s dividend yield. Here we are looking at AT&T ticker symbol T. As of the morning of November 11th AT&T paid a dividend equal to 7.21%, meaning using the Rule of 72, it would double in approximately ten years. As I said, we are ignoring any rise or fall in the stock price, which can increase the rate at which your money doubles. You must also be aware that a company’s dividend is only as strong as the earnings behind that company. Next week we will look at three telecommunications stocks and examine some of the more common means of analyzing a stock with commonly available information.
The Rule of 72 is an easy yet handy way to estimate how long an investment will take to double. Like any investment, you must have an investment plan and strategy before making any investments. If you need assistance, seek out the help of a fee-only Registered Financial Consultant.
