What's the simplest way to double your money? The punchline of an old joke will tell you to hold your cash up in front of a mirror. Sadly, that method doesn't increase your wealth or purchasing power even a little bit. A better strategy is to put your cash in the stock market, where you can rely on simple concepts to double its actual, spendable value. Here are three of those concepts to get you started.
1. 401(k) employer match
Employer match is the easiest and most reliable way to double your money in an investment account. All you have to do is contribute to your 401(k) and then stay with that employer until you're fully vested. Your employer funds your account when you do, according to a predetermined formula. Some employers match dollar-for-dollar -- meaning that you're doubling your money at least every other paycheck.
Ask your plan administrator for your matching and vesting rules. Then set your contributions accordingly and start planning your career path within that company.
2. Doubling time
The time it takes to double your money in the stock market is a function of your portfolio's average annual growth rate. If you know the growth rate, you can approximate your doubling time by dividing that rate into 72. The answer is your estimated doubling time in years.
Follow this math with the cash in your savings account and you'll quickly see the advantage of stock market investing. A good interest rate on cash today is about 0.50%. At that rate of growth, your cash balance will double in 144 years. Compare this to money invested in an S&P 500 index fund, which you could reasonably expect to grow at about 7% per year. Now you're doubling your money in less than 11 years -- a far more useful timeline.
Note the doubling time unfolds from the investment's future growth rate, which will be a guess on your part. The guess is an educated one when you're basing it on historic market averages. But your doubling time estimates will be far less reliable if you're assuming an investment will grow at 10% or 15% annually. This is because positions that outperform the market are usually less consistent. You might see 15% growth one year and 4% growth the next, for example. It's not a single year of growth that matters; it's the average over time.
Stock market volatility is scary, especially for novice investors. But it also creates opportunity for those who have the fortitude to buy when everyone else is selling. Here's an example. On March 23, 2020, the S&P 500 bottomed out below 2,300. That same day, you could have purchased Vanguard's S&P 500 ETF (NYSEMKT: VOO) for about $210 per share. As of early February 2021, this ETF is trading at over $350 per share. It hasn't quite doubled yet, but it has grown 66% in less than one year.
Do not interpret this to mean you should refinance your house to raise money for the next stock market crash. Buying during a down cycle is not an easy or quick way to make some cash. You have to manage two levels of uncertainty. First, in the moment, you don't know when the market has hit bottom. You could buy today and see your investment lose 20% of its value the very next day. Second, you don't know how long the recovery will take. It could be months, as happened in 2020, or it could be years, as with the 2009 crash.
To manage that uncertainty, focus on high-quality positions that can survive whatever circumstances are causing the market to falter. Also only invest money you don't need for at least five years, so you're not caught off guard by a drawn-out recovery.
Double down on investing
Why use a mirror to feel like you've doubled your money when you could invest and actually double your money? It's straightforward enough when you know what to do. Max out your employer match, invest in index funds and let time do the work for you, and -- if you're not in a hurry -- step up your investing activities when the market gets choppy.
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