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How to double your money
Rachna C |
May 02, 2005
ant to double your money?
When I asked a friend this question, she replied with another question: how long will it take?
So, before I proceed, let me introduce you to the Rule of 72. It is a simple way to find out how long your money will take to double.
All you have to do is divide 72 by your expected annual rate of return. The answer you get will be the number of years it will take to double your investment.
Assume you are getting 8% per annum on your investment.
Divide 72 by eight. The answer is nine.
It will take you nine years to double your investment.
Small contributions help
Adding a small amount to your investment regularly helps achieve your goal faster.
You invest Rs 5,000 at 8% per annum, compounded annually. It will take you around nine years to double the amount. Yes, that is a long time.
Let's say you decide to add Rs 1,000 every year to your investment. It should take you around three years to double the intial amount. In three years time, you will get Rs 9,804 (to be precise).
No doubt, you will end up adding money regularly but look at it from another point of view. The saving of Rs 1,000 every year will cause no dent whatsoever in your lifestyle.
Instead of sticking to Rs 1,000 every year, you can gradually increase it as your salary goes up.
Let's say you invest Rs 5,000 at 8% per annum.
You add Rs 1,000 to this kitty at the end of the year. You would have got Rs 6,480 at the end of the first year.
For the next year, add Rs 2,000 (instead of Rs 1,000) and you will end up with Rs 9,158.40 at the end of two years.
The following year, add Rs 3,000 (instead of Rs 2,000). You will end up with Rs 13,131.07 at the end of three years.
That is more than double the amount you invested.
Don't withdraw the interest
Not withdrawing the money helps.
Invest Rs 5,000 at 8% per annum. You will get Rs 400 every year. It will take you 13 years to earn Rs 5,200 as interest (if you earn an interest of Rs 400 each year). This means it will take you that long to double your investment.
If you do not take the interest every year and reinvest it instead, you will end up doubling your money at the end of nine years.
What's more, you would get Rs 10,000 as a lumpsum. Else, you would end up spending the interest you earn every year (Rs 400).
If you are convinced, there are a number of ways in which you can engage in these 'forced savings' investments.
Tomorrow: How to save