What Is the Rule of 70 and How Do Investors Use It?
Have you been thinking about how retirement will look for you? How much wealth would you need to accumulate to retire comfortably? The most accepted estimate is that on average, a person would need around 80% of their working income to maintain their current lifestyle.
What if you could double your investment savings by the time you decide to retire? The rule of 70 could show you how to bring your dreams of a wealthy retirement to fruition. Keep reading to learn about the rule of 70 and how you can use it to your advantage.
What Is the Rule of 70?
The rule of 70 is a calculation that estimates the number of years it takes for investments to double in amount at a specific, constant rate of return. Frequently used when comparing investments of different annual compound interest rates, the rule of 70 can quickly tell you how much time it would take for your investment to double; hence, the term “doubling time.”
Calculating the Rule of 70
To calculate the rule of 70, you simply divide 70 by the rate of growth, since the formula is primarily focused on the growth rate of investments. Furthermore, in finances, the rule of 70 determines how long it will take for your investment to double at a fixed interest rate.
Rule of 70 Formula
Years To Double = 70 ÷ Annual Growth Rate
The rule of 70, or the doubling time formula, is the number of years it takes for an investment to double. It equals 70 divided by the interest rate. Putting in some real numbers, a calculation would look like this: Years To Double equals 70 ÷ 5 = 14, where the interest rate is 5% and the years to double is 14.
Always use a whole number and not a decimal for the growth/interest rate. For example, use 10 instead of 0.10 for the variable if the interest rate is 10%.
Here are some additional examples of calculations using the rule of 70 with different annual growth rates.
|Annual Growth Rate||Rule of 70 Calculation||Years to Double|
|6%||70 ÷ 6||11.67 years|
|8%||70 ÷ 8||8.75 years|
|12%||70 ÷ 12||5.83 years|
When Can You Use the Rule of 70 Formula?
The rule of 70 formula can be applied in a variety of financial situations to predict how long it will take to reach a doubling time goal. One case where it often gets used is with retirement portfolio investments.
You can use it to estimate the doubling time of investments in your retirement portfolio (stocks, bonds or mutual funds). The rule of 70 could help you determine whether to add new investments to your portfolio for faster growth.
The rule of 70 is such an easy calculation that you can practically do it in your head instead of using complex math or scientific calculators. Other instruments and equations might be more accurate, but only slightly.
The Differences Between the Rules of 69, 70 and 72
The rule of 70 and the rule of 72 are basically the same formulas with the same goal — to calculate the amount of time it takes for an investment to double. The only difference is the dividend used: 70 or 72. Investors use both rules nearly equally.
Investors use the rules of 69, 70 and 72 to predict investment growth. Here are some differences among the rules and how they are typically used:
- The rule of 69: More accurate for continuous compounding interest rates
- The rule of 70: Best for semiannual compounding interest rates
- The rule of 72: Best for annual interest rates
Before using the rule of 70 to calculate doubling time, consider your investment goals and needs. What type of investor are you — long-term or short-term?
The rule of 70 helps long-term investors determine the duration, or how much time is required to double their money as well as how long they would need to continue investing to achieve doubling time.
On the other hand, if you are a short-term investor, applying the rule of 70 to your investment portfolio is also a good strategy to learn how to estimate the time required to double your investment funds, especially when your growth rate is constant.
The rule of 70 is not quite magic, but it is pretty amazing when you look at what a simple equation can show you about your financial future. Here’s what you need to remember about the rule of 70:
- The doubling time of your investments will decrease as the growth rate of your investments increases.
- Doubling time is another term referring to the rule of 70 and demonstrates how compound interest works.
- When calculating the rule of 70, always use a whole number for the growth or interest rate; never use a decimal (e.g., 12, not 0.12).
- Only one variable — the interest or growth rate — is needed when calculating the rule of 70.
- The rule of 70 is most helpful when calculating or predicting exponential growth.
Good To Know
It’s better to use the rule of 70 if growth rates tend to be steady and are not constantly fluctuating. If growth rates are prone to fluctuating, the rule of 70 might not be an adequate predictor of doubling time.
Although not scientifically perfect, the rule of 70 is adequately helpful in determining the future value of your investments. So, if you have multiple investments with different growth rates, the rule of 70 can help you compare the similarities and can provide insight into your future wealth position.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.