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.
It is frequently used when comparing investments of different annual compound interest rates.
Calculating the Rule of 70
To calculate the rule of 70, you divide 70 by the interest rate you earned on your investment.
Years To Double = 70 ÷ Interest Rate
Putting in some real numbers, a calculation would look like this: 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 and interest rate. For example, use 10 instead of 0.10 for the variable if the interest rate is 10%.
Examples
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.
Check your retirement savings progress. The result can help you determine whether to add new investments to your portfolio for faster growth.
Decide between savings account or CDs. This is how to determine which rate will get you the highest return on your savings.
Limitations of the Rule of 70
This rule’s simplicity makes it a great tool for investors. However, it doesn’t take into account how taxes and account fees can affect your gains. It also assumes that your interest rate won’t change at all, which is unlikely.
Use the rule as a guideline for how your investments are performing and if you need to make adjustments. This could mean finding a savings account with a higher interest rate or adding other assets to your investment portfolio.
FAQ
- How accurate is the Rule of 70?
- The rule is mostly accurate but it assumes the interest rate will stay the same and doesn’t take taxes and fees into account.
- Can the Rule of 70 be used for any type of investment?
- Yes, it’s meant for any type of investment.
- What happens if the interest rate changes over time?
- A higher interest rate will give you more gains. A lower interest rate will give you less.
- How can I use the Rule of 70 for retirement planning?
- You can use it to see if you need to adjust the investments in your portfolio to meet your goal.
- Does the Rule of 70 apply to inflation?
- You can use the rule of 70 to see how inflation can cut into your profits. Simply replace the rate of inflation with the interest rate in the formula. 70 ÷ Inflation Rate = Halving time