By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to increase 100 percent. For example, the Rule of 72 states that $1 invested at 10 percent would take 7.2 years (72/10 = 7.2) to turn into $2. No one gets rich overnight, but keeping this rule in mind can help you understand how long it will take to see a double return on your investments.
4. Bucket system. The bucket system is another great savings method that can help you see where your liquid investments are going and what they’re doing to help your retirement.
- Bucket one. Bonds—Income—Contributions to this bucket are invested in various types of bonds—Treasury, corporate, municipal, high yield, TIPS, international and floating rate. They will provide you with steady interest income. A well-diversified bond portfolio should protect your principal as well. To maximize your return over time, you have to diversify within this bucket.
- Bucket two. Stocks—Growth—This bucket will hold different stocks for people in different stages of life. If you’re under 60 and still working, you should consider owning growth stocks. These are shares in companies that have large growth rates, but usually, they don’t pay significant dividends. Their focus is on capital appreciation through revenue growth.
- Bucket three. A variety of Investments—Alternative Income—This is the smallest bucket of the three. It holds investments that don’t fit neatly into either of the above buckets. For example, this bucket holds investments in energy royalty trusts (publicly traded oil and gas trusts), real estate investment trusts, preferred stocks, and MLP stocks (pipeline and energy storage companies). These are traded like normal stocks on the open exchanges, but they don’t pay traditional dividends or interest—they pay distributions.