What Is the Rule of 70?
The rule of 70, also known as doubling time, calculates the years it takes for an investment to double in value. The calculation is commonly used to compare investments with different annual interest rates.
Key Takeaways
- The Rule of 70 is a calculation that determines how many years it takes for an investment to double in value based on a constant rate of return.
- Investors use this metric to evaluate various investments, including mutual fund returns and the growth rate for a retirement portfolio.
- The Rule of 70 is an estimate that assumes a constant growth rate that may fluctuate, and the calculation may prove inaccurate.
How to Calculate the Rule of 70
- Obtain the annual rate of return or growth rate on the investment or variable.
- Divide 70 by the annual rate of growth or yield.
# of Years to Double an Investment = 70/Annual Rate of Return
Examples of the Rule of 70
- Ata3%growthrate,a portfoliowill double in 23.33 years because 70/3=23.33
- Atan8%growthrate, a portfolio will double in 8.75yearsbecause 70/8=8.75
- Ata12%growthrate,a portfolio will double in 5.8 years because70/12=5.8
What Does the Rule of 70 Tell You?
The Rule of 70 helps investors determine the future value of an investment. Although considered a rough estimate, the rule provides the years it takes for an investment to double. The Rule of 70 is an accepted way to manage exponential growth concepts without complex mathematical procedures.
Investors can use this metric to compare investments with different growth rates or annual returns. If the calculation yields a result of 15 years, an investor looking to double his money in 10 years could make allocation changes to their portfolio to attempt to increase the rate of return.
Rule of 70 vs. Real Growth
The rule evaluates investments but can also estimate other economic factors such as population growth or gross domestic product (GDP). The Rule of 70 is an estimate based on a forecasted growth rate. If future rates fluctuate, the original calculation will be inaccurate.
As of March 2023, the population of the United States was approximately 336 million. A 2020 prediction estimates that the U.S. population will grow at a rate of .62% annually. Using the estimation of the Rule of 70, the population of the U.S. will double in 113 years.
Real growth figures dispute the use of the Rule of 70 in estimating population growth. In 1955, the population of the United States was approximately 172 million and is estimated to double by 2025 based on actual population counts and rates of growth. If the Rule of 70 was used in 1955 to predict the doubling of the population when the growth rate was 1.57%, the population would have doubled by 1999.
Compound Interest and the Rule of 70
Compound interest is calculated on the initial principal and the accumulated interest of previous periods.The rate at which compound interest accrues depends on the frequency of compounding. The higher the number ofcompoundingperiods, the greater the compound interest.
Compound interest is a feature in calculating the long-term growth rates of investments and the various rules of doubling. If the interest earned is not reinvested, the number of years it'll take for the investment to double will be higher than a portfolio that reinvests the interest earned.
The Rule of 70 and any other doubling rules include estimates of growth rates or investment rates of return. As a result, the rule can generate inaccurate results with its limited ability to forecast future growth.
What Is a Limitation of the Rule of 70?
The Rule of 70 assumes a constant rate of growth or return. As a result, the rule can generate inaccurate results since it does not consider changes in future growth rates.
How Is the Rule of 70 Used In Economics?
The Rule of 70 can estimate how long it would take a country's gross domestic product (GDP) to double. Instead of estimating compound interest rates, the GDP growth rate is the divisor of the rule. For example, if the growth rate for China is estimated as 10%, the Rule of 70 predicts it would take seven years, or 70/10, for China's real GDP to double.
What Is the Difference Between the Rule of 70 and the Rules of 69 or 72?
The Rule of 72 or the Rule of 69 may also be used. The function is the same as the rule of 70 but uses 72 or 69, respectively, in place of 70 in the calculations. The Rule of 69 is often considered more accurate when addressing continuous compounding processes, and 72 may be more accurate for less frequent compounding intervals.
The Bottom Line
The Rule of 70 is a calculation that provides an estimate, based on a constant growth rate, of how many years it takes for an investment to double in value. Investors may use this calculation to evaluate the investment returns of mutual funds and retirement portfolios.
FAQs
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.
What is the formula for the rule of 70 that calculates? ›
Hence, the doubling time is simply 70 divided by the constant annual growth rate. For instance, consider a quantity that grows consistently at 5% annually. According to the Rule of 70, it will take 14 years (70/5) for the quantity to double.
What can the rule of 70 be used to calculate? ›
The rule of 70 is a basic formula used to estimate how long it will take for an investment to double in value. To use the rule of 70, simply divide 70 by the annual rate of return. The rule of 70 only provides an estimate, not a guarantee, of an investment's growth potential.
What is the rule of 72 and how do you calculate using this rule? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
What is the rule of 70 example? ›
For example, if the growth rate for China is estimated as 10%, the Rule of 70 predicts it would take seven years, or 70/10, for China's real GDP to double.
What can the rule of 70 be used to calculate quizlet? ›
What is the rule of 70? is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
Why is 70 used in the rule of 70? ›
The rule of 70 (and 72) comes from the natural log of 2 which is 0.693.. or 69.3%. Basically this is rounded to 70 (or 72) to make doing the math in your head easier. It's not 100% accurate but usually when you are asking about the doubling time of a rate by quick mental estimate, a little error doesn't matter.
How can you calculate doubling time using the rule of 70? ›
Simply put, how long will it take for a certain thing to double? To calculate this, you would use the rule of 70. This rule calculates the doubling time by dividing 70 by the growth rate. You might notice this is quite similar to the rule of 72, which has you divide the number 72 by the annual rate of return.
What is the rule of 70 to calculate the growth rate that leads to a doubling of real GDP per person in 20 years? ›
According to rule 70, the no. of years that a variable can take to become double is determined by taking a ratio of 70 and the annual percentage growth rate of the given variable. In this case, the annual growth rate of real GDP is 70/20 years which is 3.5% per year.
How to calculate growth rate? ›
To calculate the percentage growth rate, use the basic growth rate formula: subtract the original from the new value and divide the results by the original value. To turn that into a percent increase, multiply the results by 100.
According to the rule of 72, you'll double your money in 24 years (72 / 3 = 24). According to the rule of 70, you'll double your money in about 23.3 years (70 / 3 = 23.3). But, the rule of 69 says that you'll double your money in 23 years (69 / 3 = 23).
What is the rule of 70 AP Human Geography? ›
To determine doubling time, we use "The Rule of 70." It's a simple formula that requires the annual growth rate of the population. To find the doubling rate, divide the growth rate as a percentage into 70.
What is the Rule of 72 and give an example? ›
For instance, if you were to invest $100 at 9% per annum, then your investment would be worth $200 after 8.0432 years, using an exact calculation. The rule of 72 gives 72/9 = 8 years, which is close to the exact answer. See time value of money. The same applies to exponential decay.
How to double 1000 dollars? ›
Here's how to invest $1,000 and start growing your money today.
- Buy an S&P 500 index fund. ...
- Buy partial shares in 5 stocks. ...
- Put it in an IRA. ...
- Get a match in your 401(k) ...
- Have a robo-advisor invest for you. ...
- Pay down your credit card or other loan. ...
- Go super safe with a high-yield savings account. ...
- Build up a passive business.
By using the Rule of 72 formula, your calculation will look like this: 72/6 = 12. This tells you that, at a 6% annual rate of return, you can expect your investment to double in value — to be worth $100,000 — in roughly 12 years.
What is the rule of 70 in simple terms? ›
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate.
Why divide by 70 for doubling time? ›
The rule of 70 (and 72) comes from the natural log of 2 which is 0.693.. or 69.3%. Basically this is rounded to 70 (or 72) to make doing the math in your head easier. It's not 100% accurate but usually when you are asking about the doubling time of a rate by quick mental estimate, a little error doesn't matter.
What is the rule of 70 inflation adjustment? ›
Rule of 70 Calculation
At present, the inflation rate is 5 per cent, so you will have to divide the current inflation rate by 70. 70/5 = 14 i.e. in 14 years the value of your savings will be halved. That means the value of Rs 1 crore will become equal to Rs 50 lakh in 14 years.
