“You can double your savings every decade without doing anything. Sound too good to be true? Mathematically, it’s actually not! This is essentially going to be a basic lesson on compounding interest and what many refer to as the rule of 72, as well as a basic introduction to a few low-fee ways to invest such that you can accrue enough interest to passively multiply your funds.”
Financial Friday: How To Double Your Savings Every Decade Without Doing Any Work
14 min read
Welcome to The Wealthy Healthy, the podcast and blog dedicated to inspiring better mental, physical, and financial health. Today we’re going to talk about how you can double your savings every decade without doing anything. Sound too good to be true? Mathematically, it’s actually not! This is essentially going to be a basic lesson on compounding interest and what many refer to as the rule of 72. Of course, it’s important to understand that this show is nearly always meant to be just an overview and introduction to ideas, and isn’t a guaranteed or professional source of financial advice. That having been said, the Rule of 72 is basically a shortcut to approximate compounding interest, which posits that with only a few reasonable assumptions made, you can consistently double your money nearly every ten years. Let’s explore a bit.
The Rule of 72
The way the rule of 72 works is that dividing the number 72 by your interest rate, you can arrive at the number of years it will take for an untouched monetary investment to double. So for example, at 6% interest, your money will double after 72/6 years, or 12 years. At 7.2% interest, you arrive at 10 years. The rule of 72 can even be used to approximate inflation: if you leave your money in a savings account for 10 years, and inflation is 2%, it will take 72/2, or 36 years, for your money to lose half of its value. This is why it is very important to invest money rather than leaving tons of liquid money in bank accounts not accruing interest. A $20,000 investment now, at a 7.2% interest rate, is $40,000 in 10 years. A $20,000 sum of money in your bank account decreases annually with inflation rates, leaving you 10 years later with $20,000 that has the modern day buying power of about $17,000 give or take. So as you can see pretty plainly, it’s important to place your money in interest-accruing investments, and leaving large sums of money sitting in a savings account is doing you no favors. Not just that, but now you’re armed with the rule of 72 which is super simple to understand and implement.
Now the more important thing to explore is how do we do this?
Where You Can Invest For Passive Returns
401k or Roth IRA
If you’re in the U.S. and not in the need of liquidity, the 401k or Roth IRA might be right for you. If you want to learn the basics of those retirement vehicles, pause this episode and check out episode 19 of the podcast. More commonly though, I hear people say they need liquidity for one reason for another. I constantly hear my friends say they are saving for a house so they leave cash sitting in their bank accounts, but when I ask them when they plan to buy, it’s usually a one or two or three year trajectory. Of course, if you’re planning to make a large purchase in the next few days or weeks, it may make sense to leave cash in your bank accounts. If you’re already very wealthy, and expecting a crash soon, and looking to preserve your wealth, I could understand this line of thinking as well, but you probably don’t need to listen to this podcast if you’re in that camp! For nearly anyone listening now though, you need a place to invest, whether it’s for two years or twenty. Outside of retirement vehicles, there are a few main ways to invest safely.
The first is to open an ETF, or exchange traded fund, with a firm such as Vanguard or Fidelity. An ETF tracks an index, a commodity, or bonds, but trades similarly to stocks. One big advantage of an ETF is that they are actually quite liquid, able to be sold and converted on the spot and available as spending money within 3-5 business days in most cases. They also have lower fees than mutual funds and many other forms of investing, meaning you aren’t going to be dinged with hefty fees that cut into your investment gains. There are many ways to go deeper into different types of ETFs and exactly how they work, but suffice to say you can quite easily hold a brokerage account with a firm such as Vanguard that includes indexed stocks and bonds, both domestic and international, so you are able to allocate funds in a manner that best suits your investment timelines and risk tolerances. Focusing on bonds will keep your interest rate lower, meaning it will take longer to double your money, but the bonds are less likely to be too heavily influenced by the state of the economy, and will not tank out in a recession in quite the way stocks would. If you’re younger, with a long investment timeline, you may be more able to take on the risk of U.S. and international stock and enjoy the long term year-over-year gains, perhaps doubling your money faster than every ten years.
Another example is to invest in mutual funds, which pool the funds of many investors get managed by individuals who invest those funds in an effort to produce capital gains for themselves and the investors involved in the mutual fund. Again, there are many varieties, including exchange-traded mutual funds which in a way combines ETFs and mutual funds to trade like an ETF, with lower fees than mutual funds, in some manner providing the best of both worlds to individual investors who aren’t placing 6+ figure investments.
How Often Do These Investments Beat 7.2% a Year?
A Look At The S&P 500
The S&P 500 is an American stock market index of 500 large companies. Since the year 2000, investments mirroring the S&P 500 has passed 7.2% in 10 of the past 17 years. 7 of those 10 years nearly doubled or more than doubled 7.2%. In 2003, 2009, and 2013, returns were over 26%. Only 4 of those years were negative, with one notable crash in 2008.
So without doing any work, if you simply invest in an S&P 500 index fund — which is provided by many of the main firms named such as Vanguard, Fidelity, Schwab, and others — you are historically likely to make short-term gains and highly likely to make long-term gains even outpacing our 7.2% baseline for doubling your income.
That’s it! Truly all you have to do is nothing: once you open a fund and invest, you can sit on it like an egg and without adding or withdrawing or changing your allocations, you can expect your money to double every 10 years, give or take a few years given the above examples. Of course, no investment is risk-free, and there is always the chance that you hope to buy a house and your investments are in the red several years in the row as the S&P 500 was from 2000 to 2002, you may be behind your original investment, but barring crashes and down markets, this is a tried-and-true, time-tested way to turn money into a lot more money essentially without lifting a finger.
All right everyone, thank you for tuning in, as always please share your thoughts, your praise, your criticism, it all serves to make the show better. Follow us on Facebook and Instagram, both at The Wealthy Healthy.
Today’s Financial Fridays episode is sponsored by certified holistic health coach Emily Rae. Emily was a guest on episode 18 of the podcast and if you listened to that you know how incredibly passionate she is about achieving great mental and physical health while eating a huge variety of delicious food. You will discover with her guidance how you can look and feel better than you ever have without having to commit to any dangerous crash diets or rigorous exercise regimens. From Skype calls to literally going grocery shopping with you, Emily will become your go-to resource for all things related to improving your health. And listen guys and gals: your first session is a FREE consultation and because we believe in getting you healthy while keeping you wealthy, if you mention the podcast you will get $75 off your 6-month program, and if you pay up front you will get another $75 off. This is a FREE first session with a certified holistic health coach, and up to $150 off for mentioning The Wealthy Healthy. Reach out for your free consultation by emailing Emily at firstname.lastname@example.org, and be sure to mention the podcast to save you some dough.