Any time you’re thinking of putting money to work for you it’s important to know what to expect along the way. This helps to set realistic goals and keep emotions at bay.
One of the quick and dirty tools we can use to help set expectations early is the Rule of 72. This rule basically says that if you divide 72 by your targeted rate of return, you will get the number of years it will take your money to double.
For example, the average return of the S&P 500 is roughly 11% at the moment. If you divide 72 by 11 you get 6 and a half years to double your money. This calculation is simple but can really lend some perspective as to what we need to invest to save for specific goals.
So if you have $10,000 to invest, don’t expect it to be the $50,000 you need for that new house in five years. It wouldn’t haven’t even doubled by then under average market conditions.
This is, of course, just looking at averages and what you actually experience may vary greatly from that outcome. This is why we must not only look at what rate of return you need, but also how much volatility you can withstand when planning for any investment goal.
*The formula used for the Rule of 72 approximates the time it will take for a given amount of money to double at a given compound interest rate. Compound illustrations are not predictions of investment performance, and investment principal and interest are not guaranteed and are subject to market fluctuation.