What Is the Rule of 70
The rule of 70 is a method of determining how long it will take for an investment or your money to double. The rule of 70 is a computation that determines how long it will take for your money to double at a particular rate of return. The technique is widely used to compare investments with various yearly compound interest rates in order to rapidly assess how long an investment would take to increase. The rule of 70 is also known as doubling time.
Rule of 70 Formula
How to Calculate the Rule of 70
- Determine the yearly rate of return or the rate of growth on the investment or variable.
- Divide 70 from the yearly rate of growth or yield.
What Does the Rule of 70 Tell You?
The rule of 70 may assist investors in determining the future worth of an investment. Although it is just a rough estimate, the formula is quite successful in calculating how long it will take for an investment to double.
This indicator may be used by investors to analyze different assets, such as mutual fund returns and the growth rate of a retirement portfolio. For example, if the computation returned a result of 15 years for a portfolio to double, an investor who wants the outcome to be closer to 10 years may make portfolio allocation modifications to try to boost the growth rate.
The rule of 70 is widely regarded as a method of dealing with exponential growth principles without resorting to sophisticated mathematical processes. When assessing the prospective growth rate of an investment, it is most typically associated with products in the financial industry. An estimate in years may be obtained by dividing the number 70 by the predicted rate of growth or return on financial transactions.
Rules of 72 and 69
In certain cases, the rule of 72 or the rule of 69 is used. The function is the same as the rule of 70, except it substitutes the numbers 72 or 69 for 70 in the computations. While the rule of 69 is commonly seen to be more accurate when dealing with continuous compounding processes, the rule of 72 may be more accurate when dealing with less frequent compounding intervals. The rule of 70 is often utilized since it is easy to remember.
Other Uses for the Rule of 70
Another helpful use of the rule of 70 is determining how long it would take a country’s real GDP (gross domestic product) to double. In the same way, that compound interest rates are calculated, we might use the GDP growth rate as the rule’s divisor. For example, if China’s growth rate is 10%, the rule of 70 forecasts that it will take seven years, or 70/10, for China’s real GDP to double.
Rule of 70 Vs. Real Growth
It is critical to note that the rule of 70 is an estimate based on projected growth rates. If growth rates alter, the initial computation may be incorrect. The population of the United States was predicted to be 161 million in 1953, and it has since more than doubled to 321 million in 2015. The growth rate was recorded as 1.66 percent in 1953. According to the rule of 70, the population would have more than quadrupled by 1995. Changes in the growth rate, on the other hand, reduced the average rate, rendering the rule of 70 calculation erroneous.
While not a perfect approximation, the rule of 70 formula may be useful when dealing with compounding interest and exponential development. This may be used to any instrument that is predicted to expand steadily over time, such as population growth. However, the rule is not properly applied when the growth rate is expected to fluctuate substantially.
- The rule of 70 is a calculation to determine how many years it’ll take for your money or an investment to double given a specified rate of return.
- Investors can use this metric to evaluate various investments including mutual fund returns and the growth rate for a retirement portfolio.
- It’s important to remember that the rule of 70 is an estimate based on forecasted growth rates. If the rates of growth fluctuate, the original calculation may prove inaccurate.
Rule of 70 Example
Assume an investor is analyzing their retirement account and wants to know how many years it will take to double the portfolio based on different rates of return. Several estimations of the rule of 70 based on different growth rates are shown below.
At a 3% growth rate, the portfolio will double in 23.3 years since 70/3=23.33 years.
At a 5% growth rate, the portfolio will double in 14 years since 70/5=14 years.
At an 8% growth rate, the portfolio will double in 8.75 years since 70/8=8.75 years.
Because 70/10=7 years, it will take 7 years for the portfolio to double at a 10% growth rate.
At a growth rate of 12%, the portfolio will double in 5.8 years since 70/12=5.8 years.
What Is the Distinction Between Compound Interest and the Rule of 70?
What Is the Difference Between Compound Interest and the Rule of 70?
Compound interest (or compounding interest) is interest computed on the original principle of a deposit or loan, which includes all accrued interest from prior periods. Compound interest accrues at a rate determined by the frequency of compounding, with the larger the number of compounding periods, the bigger the compound interest.
Compound interest is a key factor in determining investment long-term growth rates and the different doubling rules. If interest is not reinvested, the number of years required for the investment to double is greater than in a portfolio that reinvests money generated.
The Rule of 70’s Limitations
As previously mentioned, the rule of 70, as well as any of the doubling rules, incorporate estimations of growth rates or investment rates of return. As a consequence, since it is restricted in its capacity to estimate future growth, the rule of 70 might provide erroneous conclusions.
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