3 Proven Ways to Double Your Money

Image by Grace Kim. © The Balance 2019

 

Everyone is interested in doubling their money. But while it might sound like a too-good-to-be-true gimmick, there are legitimate ways that you can double your money without taking unnecessary risks, winning the lottery, or striking gold.

Spend Less

The amount left over if you spend less money than you earn in income is your savings. Save three months of living costs into an emergency fund. After that, invest your savings. 

You can invest it in tax-advantaged retirement accounts, such as a 401(k) or IRA, or you can invest your money in taxable brokerage accounts.

If you buy passively-managed index funds (a fund that mimics a general index, such as the S&P 500), your investment will perform as well as the overall economy does.

From 1990 through 2017, the S&P 500 averaged about a 10 percent annualized return on investment. That means that in any given year, stocks may have risen or fallen. However, if you stayed invested throughout those 27 years, and you reinvested all of your gains, you would have earned roughly 10 percent per year.

Don’t forget, 1990 through 2017 is a time period that includes several atypical events, like two massive recessions, several corrections, as well as various bubbles.

How does this 10 percent return relate to doubling your money? Well, the Rule of 72 is a shortcut that helps you figure out how long it will take your investments to double. If you divide your expected annual rate of return into 72, you can find out how many years it will take you to double your money. 

Let’s say, for example, that you expect to get returns of 10 percent a year. Divide 10 into 72, and you discover the number of years it takes you to double your money, which is seven years. 

By spending less than you earn, investing in an index fund that tracks the S&P 500, and reinvesting your gains, you can double your money roughly every seven years, assuming the stock market performs as it did during the 1990 through 2017 time period.

Bonds

Your mix of stocks and bonds should reflect your age, goals, and risk tolerance. If you don’t fit the profile of somebody who should be heavily invested in equities, such as S&P 500 index funds, you can look to bonds to double your money. 

If your bonds return 5 percent on average every year, according to the Rule of 72 you can double your money every 14.4 years. 

That might sound disheartening compared with doubling your money in seven years, but remember that investing is a bit like driving on a highway. Both fast drivers and slow drivers will ultimately reach their destination. The difference is the amount of risk they assume to do so. 

By obeying the speed limit, you put yourself in a position in which you are likely to arrive at your destination in one piece. By stomping on the accelerator, investors can either reach their final destinations faster or crash and burn.

Driving is always risky, just as investing is always risky, but certain investments expose you to higher levels of risk than others, just as disobeying the speed limit exposes you to greater risk than obeying the speed limit.

You can double your money by investing in bonds. It's likely to take longer, but you'll also decrease your risk.

Employer Match 

If your employer matches your 401(k) contributions, you have the easiest, most risk-free method of doubling your money at your disposal. You will get an automatic increase on every dollar that you put in up to your employer match. 

For example, if your employer matches 50 cents for every dollar that you put in up to 5 percent of your pay. You are getting a guaranteed 50 percent "return" on your contribution. That is one of the only guaranteed returns in the world of investing. 

If your employer doesn’t match your 401(k), don’t despair. You still get tax advantages by contributing to your retirement account. Even if your employer doesn't match your contribution, the government will still subsidize a portion by giving you either a tax-deferral up front or a tax-exemption down the road, depending on whether you use a Traditional or a Roth account respectively).

Create and maintain a strong budget that guides where your dollars will go every month. It will help you spend less than you earn, then you can invest the difference.