The greatest thing about money is that it can earn more money. When you have savings, your main goals are to protect them and grow them over time. If you were to bury your savings in the backyard, they’d be safe from theft, but they’d also lose value as the years go by. This happens because of inflation—the rising cost of goods and services. That means that even though you still have the same amount of money, it buys less as prices increase. So, protecting money without allowing it to grow isn’t the best way to save for the future.
How can you protect your money while letting it grow over time? There are two ways this can happen: regular growth and exponential growth.
Regular Growth
Let’s start with regular growth. Imagine you put $1 in a safe place, like a piggy bank. Every year, you add 10 cents to the piggy bank, which is 10% of your original dollar. How long would it take to double your money?
Since you’re adding 10 cents every year, it would take 10 years for your $1 to grow into $2. You started with $1, added 10 cents every year, and by the end of 10 years, you’d have $2.
This type of growth is called regular or linear growth because the increase remains the same over time. The only way your money grows is through the additional 10 cents you put in each year.
Exponential Growth
Now, let’s look at a better way for your money to grow—exponential growth. Imagine you invest that same $1, and it earns 10% interest each year. In the first year, your dollar would grow to $1.10, just like in the regular growth example. But here’s the difference: in the second year, your 10% interest would be on the new amount—$1.10—so your total would grow to $1.21. In the third year, your total would be $1.33, and by the fourth year, it would be $1.46.
With exponential growth, your money doubles in just over seven years—three years sooner than with regular growth. Even more amazing, your money grows faster as time goes on, and you’re not adding anything extra after the first year.
What Makes Exponential Growth Special?
Exponential growth is like a snowball rolling down a hill. At first, the snowball is small, and it moves slowly. But as it rolls, it picks up more snow, grows larger, and moves faster. The same thing happens with your money. As your savings grow, they pick up speed, and before you know it, your money is growing quickly.
This slow-but-steady growth is often frustrating at the start, but it’s the foundation of a successful retirement plan. Over time, compound growth—the process of earning interest on both your original investment and the interest it has already earned—works in your favour.
The key is understanding how long it takes for your money to double. That’s where the Rule of 72 comes in.
The Rule of 72
The Rule of 72 is a simple formula that helps you estimate how long it will take your money to double, given a fixed annual growth rate. To use the rule, you divide 72 by the interest rate you expect to earn.
For example, if you expect a 10% return on your investment, divide 72 by 10. The result is 7.2 years. That’s how long it will take for your money to double with a 10% annual growth rate.
The Rule of 72 isn’t exact, but it’s pretty close. For more precise calculations, you could use a spreadsheet, but for quick estimates, the Rule of 72 is a helpful tool.
What Does This Mean for You?
Now, let’s apply the Rule of 72 to real-life situations.
If you put your money in a savings account that pays 1% interest, it would take 72 years to double your money (72 divided by 1 = 72). That’s not a great retirement plan!
What if you invested in a bond or a Guaranteed Investment Certificate (GIC) that pays 3% interest? At that rate, it would take 24 years to double your money (72 divided by 3 = 24). That’s better, but it’s still not ideal.
To get better returns, you may need to take on more risk, such as investing in the stock market.
Balancing Growth and Risk
Let’s say you buy a risky stock, and the share price doubles in a year. You’ve doubled your money! But if that stock loses all its value, you’re left with nothing. That’s not investing—it’s gambling. High risk can mean high reward, but it also means you could lose everything.
A smarter approach is to find a balance between growth and risk. Historically, the stock market has averaged an 8% annual return. That means your money would double every nine years (72 divided by 8 equals 9).
But remember, that 8% is an average. Some years, the market will go up, and some years, it will go down. Your goal is to achieve the long-term average. If you don’t add any more money to your investment after the first year, your savings could double four times over a 36-year period (9 years multiplied by 4 = 36). That’s a solid plan for long-term growth.
This example also shows why it’s so important to start saving early. The earlier you start, the more time your money has to grow and double. However, even with an 8% return, it might not be enough to secure your retirement. So, how can you make your money grow even faster?
Supercharge Your Growth – The Ultimate Strategy
The Rule of 72 assumes that you only invest money once and wait for it to grow. But there’s a way to speed things up: add money to your investment every year. The more you contribute to your savings, the faster it will grow.
To get the most out of compound growth, aim to save 10% of your gross income every year. As your income increases, your savings will also increase, accelerating your growth over time.
A Real-Life Example
Let’s say you earn $60,000 per year and save 10% of your income, or $6,000, each year. If your investments earn an average of 8% per year, here’s how your savings could grow over time:
- After 11 years, you’d have around $100,000.
- After 19 years, you’d have $250,000.
- After 26 years, you’d have $500,000.
- After 31 years, you’d have $750,000.
- After 35 years, you’d reach $1 million.
This example assumes your income stays the same over 35 years, which is unlikely. But it shows how savings can grow slowly at first, then speed up over time. This is the magic of compound growth in action.
If you would like a more precise explanation of the rule of 72 read – The Rule of 72: What It Is and How to Use It in Investing.
Conclusion
The Rule of 72 is a powerful tool to help you estimate how long it will take your money to double. By understanding both the risks and rewards of different types of investments, you can create a plan that balances growth and safety.
The key to success is to start early, invest wisely, and make regular contributions to your savings. Even small changes, like saving 10% of your income each year, can lead to big results over time.
For a more detailed discussion on low-fee, diversified funds and other smart investment options, check out David’s post, “Easy As One Two Three.”. Remember, sensible investing and patience are the keys to achieving long-term financial security. Happy investing!
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
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The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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