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Figuring the time it takes to
double your money
Dear Money Matters,
What is the calculation to determine the time it takes for your
money to double at different interest rates?
Terry
Dear Terry,
There's a rough calculation you can do in your head, commonly known
as the "Rule of 72." It gets its name through a calculation
that shows money earning 10 percent consistently every year will
double in approximately 7.2 years.
All you have to do is divide 72 by the interest rate
you expect to earn. To illustrate: money earning 6 percent will
take 12 years to double (72 divided by six equaling 12). By contrast,
money pulling down an 8 percent annual interest rate will grow to
twice its size in nine years.
This formula can also be flipped around to help you
determine what sort of interest rate you may need to reach a particular
goal within a certain time. For interest, let's say you have $15,000
saved and you need to double that in five years to get to a $30,000
house down payment. To arrive at that figure, just divide 72 by
the number of years you have to reach your goal -- in this case,
that comes to 14.4 percent every year for five years (72 divided
by five).
Handy as these formulas can be for calculating projected
rates of return -- and, from there, earmarking investments that
stand a reasonable chance of nailing down the returns you need --
know that they only provide approximate answers, although the end
results are fairly close to the specific numbers. For example, at
10 percent, the rule of 72 says you'll double your money in 7.2
years. Actually, it's 7.27 years. The rule furnishes a good approximation
for low interest-rate numbers and becomes less precise the higher
the interest rate used, so it's of little value to Mafiosi loan
sharks.
Bankrate's calculators can help you identify how much
you need to save and at what rate of return. For instance, check
out the investment
goals calculator. Here, you can plug in money you have saved
to date, how much you would like to have for a particular goal and
the time in which you have to save. Even better, the calculator
plugs in average rates of return for various sorts of investments
(although you always have the option of inserting the rates that
are most applicable to you). Then, the calculator identifies how
much money you need to invest to attain your identified goal within
the specified time.
By contrast, Bankrate's "Saving
for the Future" calculator gives you an idea of how much
you need to save on a monthly basis to reach a particular goal.
Like the first calculator, this one lets you plug in variables --
including your savings goal, how much time you have available and
other factors -- then shows you how much money you have to set aside
every month to reach the goal. As an added feature -- one that may
mitigate the sting of seeing an intimidating monthly amount -- the
calculator also illustrates what that boils down to in terms of
weekly and even daily savings amounts. Seeing $250 a month can be
discouraging, but being able to save a modest $8 a day or so may
strike you as far more plausible.
-- Posted: July 9, 2002
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