Sunday, November 20, 2011

How Many Doubling Periods Do You Have Left?

So many successful people struggle with procrastination. Does this statement describe you? Do you say to yourself, "I'll start investing for my retirement next year." Hopefully, by the time you read this, you will no longer procrastinate and start investing for your future as soon as possible.

First of all, an easy way to estimate how many years it will take to double your money on a one-time investment is to apply the Rule of 72. Basically, this means that dividing the annual interest rate into the number 72 approximates the number of years it will take to double your money.

For instance, if you knew that you were getting a 2% rate of return on your investment (72 ÷ 2 = 36); it would take you 36 years to double your money – meaning you only have one doubling period in 36 years. At 6% it would take you 12 years to double your money and that would give you 3 doubling periods in 36 years. At 12% it would only take 6 years to double your money allowing for 6 doubling periods in 36 years!

If we were to take a fictitious $10,000 and apply the Rule of 72 to it, this is what it would look like based on the different interest rates discussed above:
Now let’s take an extreme case. In an earlier blog post titled The Cost of Waiting to Invest, I mentioned that if a one-time-investment of $1000 was made for you when you were 6 months old and it was working at a 12% rate of return - that would grow to $2.3 million by the time you were 65. And this could be accomplished without adding any new money! Now, at birth, you would have almost 11 (10.83) doubling periods until you were 65, if your money was working at 12%.

Now, let’s say that now that you know that $1000 can easily grow to $2.3 million in 65 years, you set that as your goal at age 65. Let’s also, assume you are like most people and you procrastinate. If you were to wait just 10 years until age 10, you would have 55 years or a little over 9 doubling periods left until you were 65. At age 10, $1000 is no longer going to cut it – you are going to instead need to invest $3300 one-time working at 12% to get the same results at age 65.

By waiting just 10 more years, at age 20 you would need to make a one-time investment of $10,893 working at 12% to accumulate $2.3 million by the age of 65 because you would only have 7.5 doubling periods left.

Waiting 10 more years until age 30, leaving you with only 5.8 doubling periods, you would need to make a one-time investment of $35,950!

So, hopefully you can see, it is never too late to start investing – it will always be possible to make “catch up” payments later. However, be warned, that over time those “catch up” payments can get you because they will grow exponentially. Don’t overspend on the high cost of procrastination. Instead, make the investment in your future goals now.

The difference is that discipline weighs ounces while regret weighs tons.
~ Jim Rohn

How many doubling periods do you have left?

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any comments, please post them below, otherwise, feel free to contact me.
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