Question

For instance, let’s say I invest $1000 in a good growth-stock mutual fund at a 12% annual rate of return. In 10 years, the time value of money equations we have learned tell us that this $1000 investment will have grown to $3,105.85.

Now let’s say I double the length of time, to 20 years. Does this also mean the amount of money I will have also doubles?

Answer 1

If the length of the time is doubled to 20 years, the amount of money in 20 years is calculated as follows

Future value = Present value x ( 1 + Interest rate)ⁿ

Future value = $ 1000 x ( 1 + 0.12)²⁰

Future value = $ 9,646.29

We observe that doubling the amount of time has resulted in the initial investment being more than doubled, infact the initial investment has tripled. This is due to the effect of compounding.

A simple technique to know the amount of time it takes for money to double is the rule of 72.

According to this rule the amount of time taken to double the money = 72 $\div$ Interest rate

If the interest rate is 12%, the amount of time taken to double the money = 72 $\div$ 12

The amount of time taken to double the money = 6 years.