5 steps to a healthy portfolio
Most of us have regular medical check-ups so that any health issues can be identified at an early stage and get addressed properly. Our investment portfolios require similar care.
POSTED ON 19 JANUARY 2019
Simply divide 72 by the expected annual rate of return to get a rough estimation of how many years it will take for your investment to double.
Suppose you put your money in a savings account with an interest rate of 1.5%. To double the amount, you will need to take 48 years. Now let's compare with investing the same amount in a mutual fund with an 3% average annual return, you can expect to double your money in 24 years.
As you can see, modest increase in rates have dramatic effects on the doubling time.
|6||In times of historically low interest rates, it's especially important to start investing early||$20,000|
You can also use the Rule of 72 to calculate the number of years for the value of your money to erode due to inflation. As you may know, inflation decreases the value of money over time. To calculate how long, it will take to halve your purchasing power, simply apply the same formula:
# of years of halve = 72 divide by inflation rate
Assuming that the inflation rate is at 4%, $1,000,000 which you have, will lose half its value in 18 years' time!
While the Rule of 72 only provides a rough estimation, it is still a useful tool to help you understand the effects of compound interest on your wealth goals.
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