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
There is an important relationship between the percent growth rate and its doubling time known as “the rule of 70”: to estimate the doubling time for a steadily growing quantity, simply divide the number 70 by the percentage growth rate.
What is the rule of 70 and how is it calculated? ›
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 rule of 70 example problem? ›
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 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.
How do you use the 70% rule? ›
Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
How do you calculate 70 of an amount? ›
Simple multiply that number by 70/100. and you'll get your answer. As 70/100=0.7 so multiply that number by 0.7. i.e. x*0.7 and you'll get your answer.
What is the rule of 70 is a formula for determining the approximate? ›
The rule of 70 is a mathematical approximation used to estimate the time it takes for a quantity to double in exponential growth or compound interest scenarios. The rule of 70 states that if a quantity grows at a constant annual rate, it will approximately double in size after about 70 divided by the growth rate.
What is an example of the 70% rule? ›
How To Calculate How Much You Should Pay For A Property To Flip. Let's say you estimate that your home's ARV will be $220,000. To get a rough estimate of how much you should pay for that property, multiply that $220,000 figure by 0.7, and you'll get $154,000.
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 the rule of 70 important? ›
The rule of 70 offers a way to figure out the doubling time of an investment. In other words, it shows you how many years it will take for your initial deposit to double in size. You'll need to know the specific rate of return in order to use the rule of 70 or doubling time formula.
How the Rule of 72 Works. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2.
What is the best definition of the Rule of 72? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the difference between the rule of 70 and the Rule of 72? ›
📝 How to Apply Them:
Rule of 70: Divide 70 by the annual rate of return to estimate the number of years it takes for your investment to double. Rule of 72: Divide 72 by the annual rate of return to estimate the number of years it takes for your investment to double.
How do you use the rule of 70 to calculate? ›
The Rule of 70 Formula
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.
Is the 70% rule realistic? ›
While the 70% rule is a great place to start when estimating what you should pay for a property, you should also remember that it's just a tool, not a guarantee of profit. Any number of factors can affect a real estate purchase. First, it's possible your estimated repair costs won't be what you thought they would be.
How do you calculate 70 retirement rule? ›
The 70% rule for retirement savings says your estimated retirement spending will be 70% of your pre-retirement, post-tax income. Multiplying your post-tax income by 70% can give you an idea of how much you may spend once you retire.
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. As of 2017, the annual growth rate for the entire world is 1.053%.
What does the rule of 70 show us? ›
What's the “rule of 70?” The rule of 70 is an easy method of estimating how quickly a variable will double if you know its annual growth rate. If a variable is growing at a rate of x% per period, you simply take 70 and divide it by x. The rule of 70 is useful for all sorts of applications.
How is the rule of 70 derived? ›
Deriving the Rule of 70
The rule of 70 is simply a result of the mathematics of compounding. Mathematically, an amount after t periods that grows at rate r per period is equal to the starting amount times the exponential of the growth rate r times the number of periods t.
