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Investing can sometimes require a significant amount of patience, but there are milestones along the way that can give an investor signs that they are moving in the right direction. One of these is doubling your money. This shows you are on your way to reaching your goals and that your investing efforts are paying off. The time it takes to achieve this goal depends on the rate of return your investments generate.
Some of this comes from the capital appreciation of your investment over time; for example, if you invest in a high-flying tech stock, you may see your money double in a short period of time, but that money is only realized when you cash out. Because what goes up quickly can also come down quickly, diversification is crucial.
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One tool in an investor’s arsenal is anything that generates a high yield, particularly an 8% annual return. This can be a powerful tool for growing your wealth over time. Let’s explore how long it would take to double your money with an 8% yield, both with and without compounding returns, and examine some investment options offering yields of 8% or higher.
The Power Of Compounding – When Your Money Makes You Money
An 8% yield refers to the annual return on your investment paid back to you in cash, expressed as a percentage of your initial investment. For example, if you invest $10,000 in a security that yields 8%, you can expect to earn $800 in returns over the course of a year.
Compounding returns involve reinvesting your earnings back into the investment, allowing your money to grow exponentially over time. On the other hand, non-compounding returns involve taking your earnings out of the investment each year, resulting in a linear growth of your money.
Compound interest is a powerful concept that allows your money to grow at an accelerating rate. The formula for compound interest is:
A=P(1+r)nA = P(1+r)^nA=P(1+r)n
Where:
-
A is the final amount,
-
P is the initial principal,
-
r is the annual interest rate,
-
n is the number of years.
A simple way to estimate the time it takes to double your money with compound interest is the Rule of 72. By dividing 72 by your annual interest rate, you get the approximate number of years needed to double your investment. With an 8% yield, it would take approximately nine years to double your money (72 / 8 = 9).
Here’s how a $10,000 investment would grow at an 8% annual yield, compounded yearly:
|
Year |
Balance |
|
1 |
$10,800 |
|
2 |
$11,664 |
|
3 |
$12,597 |
|
4 |
$13,605 |
|
5 |
$14,693 |
|
6 |
$15,869 |
|
7 |
$17,138 |
|
8 |
$18,509 |
|
9 |
$19,990 |
By the end of the ninth year, your initial $10,000 investment would have nearly doubled to $19,990, thanks to the power of compound interest.
The Slower Path, Using Simple Interest To Grow Your Investment
Simple interest involves earning a fixed rate of return on your initial investment each year without reinvesting your earnings. The formula for simple interest is:
A=P(1+rt)A = P(1+rt)A=P(1+rt)
Where:
-
A is the final amount,
-
P is the initial principal,
-
r is the annual interest rate,
-
t is the number of years.
If you invest $10,000 at an 8% simple interest rate, your money would grow by $800 annually. Double your initial investment would take 12.5 years ($10,000 / $800 per year = 12.5 years).
Compared to the compounding scenario, the simple interest scenario requires an additional 3.5 years to achieve the same goal.
The difference between compounding and non-compounding returns becomes even more pronounced over more extended periods. For example, investing $10,000 at an 8% yield for 30 years would grow your money to:
-
$100,627 with compound interest
-
$34,000 with simple interest
This stark contrast highlights the importance of reinvesting your returns. By putting your earnings back into your investment, you allow your money to work harder for you over time, resulting in significantly greater wealth accumulation.
Private credit offers up to 20% APY. Potential accredited investors are looking to capitalize on this growing asset class.
Places To Find An 8% Yield
An 8% yield isn’t usually something you will find offered by banks or even CD rates. Some high-yield bond funds may promise an 8% or higher return. Many investors find these returns through investments in real estate offerings, including fractional real estate, private credit funds, and other offerings. There are some stocks that currently provide an over 8% yield.
OneMain Holdings, Inc. (NYSE:OMF), a leading consumer finance company, offers a robust dividend yield and a consistent payout history. With a forward dividend yield of approximately 8.08%, OneMain Holdings stands out as an attractive option for income-focused investors. The company provides personal loans and other credit-related products, benefiting from its extensive branch network and strong customer base. Despite the competitive landscape in consumer finance, OneMain Holdings’ solid financial performance and prudent risk management practices have enabled it to maintain its high dividend yield.
Investors seeking diversification beyond traditional dividend stocks may find Ares Capital Corporation (NASDAQ:ARCC) an intriguing opportunity. As a leading business development company (BDC), Ares Capital focuses on providing debt and equity financing to middle-market companies. Historically, Ares Capital has delivered a strong dividend yield, currently around 9.50%. This high yield is backed by the company’s diversified investment portfolio and its focus on senior secured loans, which provide a stable income stream. Ares Capital’s commitment to maintaining its high distribution rate makes it an appealing choice for investors seeking higher yields and potentially faster wealth accumulation.
Both of these stocks are heavily tied to the lending environment, which means they carry elevated risk if the economy experiences a sudden downturn. Investors are advised to make sure they fully understand the impact of changing interest rates or higher default rates on these companies before investing.
The Bottom Line
The time it takes to double your money with an 8% yield depends on whether your returns are compounding or not. With compound interest, you could expect to double your money in approximately nine years, while it would take 12.5 years with simple interest. You can accelerate your wealth-building journey by choosing investments that offer solid yields and the potential for compounding, such as high-quality dividend stocks like OneMain Holdings or alternative investments like Ares Capital Corporation.
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This article How Long Does It Take to Double Your Money With An 8% High-Yield Investment? originally appeared on Benzinga.com
Source: finance.yahoo.com