If you knew that you could double your money in a matter of 10 years, would you do it? For most people, this sounds super attractive, but 10 years is a really long time to wait.
If you’re someone who has a lot of patience and wants to understand the power of compound interest, then I’m going to show you literally how simple it is to double your money in just 10 years time.
How to Double Your Money with Investing
Let’s say you have $5,000 in your bank account. If you take this money, invest it in the stock market, and realize a 7.2% annual rate of return, your $5,000 will turn into $10,000 in a matter of 10 years.
There’s a few assumptions here like where does the 7.2% come from, and what exactly should you invest in, but for now, let me first prove to you that this actually works.
Starting off with $5,000 today (year zero) and a 7.2% rate of return, at the end of year one you will have $5,360. Assuming the same rate of return, at the end of the year two, you will have $5,745. Year three, $6,159, and so on and so forth until year 10 where you will have over $10,000.
Pretty cool, right? That is the power of compound interest which simply means that your earnings are reinvested, and this pretty much creates a snowball effect with your money.
The Rule of 72 vs a 10% Rate of Return
Going back to this 7.2% number, where did this come from? This is called the Rule of 72, and this is a financial estimate for estimating an investment’s doubling time.
More realistically, if you invest your money in the S&P 500, you’ll see closer to a 10% annual rate of return. Let’s see what 10% does to your $5,000.
At the end of the first year, you will have $5,500. End of year two, $6,050. End of year three, $6,655, and so on and so forth until the end of year 10 where you will have nearly $13,000.
What’s really cool about this is the fact that the longer you keep your money invested in the stock market, the more it will grow.
Going out another 10 years, you’ll have $33,000 at a 10% rate of return, 10 more years will give you $87,000, and projecting out a full 40 years, your initial deposit of $5,000 will become a staggering $226,296!
As you can see, it really pays to invest your money and not only that but invest your money as early as possible, because when you have a lot of time in front of you, you can simply let your money passively grow in the background.
What to Do Next
I want to leave you practical and actionable advice with the caveat that I’m not a financial advisor, but in order for you to invest in the S&P 500 and get that average 10% rate of return, I recommend investing in a low-cost index fund.
You have a lot of options including VOO which is Vanguard’s S&P 500 Index Fund, IVV which is iShares Core’s S&P 500 Index Fund, and SPLG which is SPDR’s S&P 500 Index Fund.
These options have very low expense ratios of between 0.03% and 0.04%, but the cheapest option that I could find was FXAIX which is Fidelity’s S&P 500 Index Fund with a low expense ratio of just 0.015%.
For more practical investment tips, check out some of my other blog posts here, and let me know if you have any questions down below.