What Is the Rule of 70?
The rule of 70 is a way to estimate how many years it takes for a person's money or investment to double. Typically, the rule of 70 is a calculation to help determine the number of years it might take to double the money with a specific rate of return. This rule is often used to compare investments when they have different annual interest rates compounded. That way, it's easy to find out how long it would take to see the investment quickly grow. Sometimes, financial investors refer to the rule of 70 as doubling time.
What is the rule of 70? It requires a specific formula. You divide 70 by the annual rate of return to get the number of years it would take to see the investment double in size.
How to Calculate this Rule of 70
It is essential to get the annual growth rate or return rate on the investment or the variable.
Divide the annual growth rate or yield by 70 to see the results.
What Does This Tell an Investor?
The rule of 70 helps investors determine the value of their investment right now and what it might be in the future. While this is a rough estimate, the rule can be very effective. It's easier to figure out how many years it would take for that investment to double in size.
Investors can easily use such a metric to evaluate different investments. These can include the growth rate for a person's retirement portfolio or mutual fund returns. For example, a calculation yielded the result of 15 years before the portfolio doubles in size. The investor prefers for that result to be close to 10 years instead. Therefore, they could make suitable allocation changes to their portfolio to increase the investment's growth rate.
The rule is ultimately accepted as the way to manage various exponential growth concepts without having to use complex mathematical procedures. Typically, it is related to the items within the financial sector to examine the investment and its potential growth rate. When the number "70" is divided by the expected annual rate of growth or the return on financial transactions, the estimate in years is produced.
Limitations for the Rule of 70
Typically, the rule of 70 works very well. However, the answer received isn't completely accurate for various reasons.
For one, it assumes that something is compounded continuously. Therefore, the interest is constantly calculated and then added to the account. Most savings accounts end up compounding interest monthly instead of constantly. Even a regular CD is only compounded once a month, so it's not truly continuous. This happens because there's usually a set interest rate, and the investor doesn't touch it for the term's length. With that, the rule of 70 slightly underestimates how many years it takes for the it to grow.
The difference isn't noticeable with a small annual growth rate, but it becomes apparent when dealing with higher rates, such as 10 percent or more. This is significant if the investor is estimating investment growth, such as mutual funds or stocks.
Changing the account balance can also change those calculations, especially if there are large withdrawals or deposits within the time period.
The rule of 70 assumes a constant growth rate for the investment's lifespan. Most savings accounts aren't going to change the interest rate, but that can happen. Year after year, an investment or stock portfolio can have a different annual rate of growth and return. Therefore, it's nearly impossible to predict it for the next year. It's best to recalculate regularly as the annual rate of return changes.
In a sense, the rule of 70 and the rules to double it include estimates of the growth rates or rates of return on investments. Therefore, inaccurate results are possible.
Considerations for Rules 69 and 72
Sometimes, people can use the rule of 69 and the rule of 72. The function is similar for these as with the rule of 70. However, it uses 69 or 72 in place of 70 for the calculations. Ultimately, the rule of 69 is more accurate when focused on continuous compounding double time. Still, 72 might be more accurate for compounding intervals that happen less frequently. There is a various number of years that can be used for doubling time.
Other Applications for the Rule of 70
The rule of 70 has other useful applications, as well. It is possible to determine how long it might take for a country's real GDP (gross domestic product) to double. This is similar to calculate the compound interest rates. Use the GDP growth rate as the divisor for the rule of 70. For example, the growth rate in China is at 10 percent. With the rule of 70, it predicts that it might take seven years for the real GDP in China to double (70/10).
Rule of 70 vs. Real Growth
It is essential to remember that this rule of 70 is just an estimate based on various forecasted growth rates. If the growth rate fluctuates, the original calculation might prove to be inaccurate.
The US population was estimated at just 161 million in 1953. In 2015, it doubles to 321 million. The growth rate in 1953 was listed as just 1.66 percent. With the rule of 70, the population should have doubled by 1995. Since there were changes to the growth rate, it lowered the average rate, so the rule of 70 was inaccurate.
Though the rule of 70 isn't a precise estimate, the equation does provide some guidance when handling compounding interest issues and exponential growth. That can be applied to any instrument that sees steady growth expected for the future and the long-term. For example, population growth with time is a great one. However, the rule of 70 isn't applied well for instances where growth rates are anticipated to vary significantly.
Takeaways So Far
The rule of 70 is a great calculation to find out how many years it might take for the investment value to double, given a particular rate of return.
Investors often use this metric to evaluate an investment to find out when it might double. This includes mutual fund returns and growth rates for retirement portfolios.
Remember that the rule of 70 is just an estimate based on the forecasted growth rate with time. If these rates fluctuate, the original calculation made might be inaccurate.
Examples for the Rule of 70
An investor wants to review their retirement portfolio to determine how long it might take to double it, given the various rates of return. The investment options made can be useful for future value and are related to growth rates.
Here are various calculations on this rule based on different growth rates:
With a 3 percent growth rate, it could take 23.3 years for a portfolio to double (70/3).
With a 5 percent growth rate, it takes 14 years to double (70/5).
With an 8 percent growth rate, it takes 8.75 years to double (70/8).
With a 10 percent growth rate, it takes seven years to double (70/10).
With a 12 percent growth rate, it takes 5.8 years to double (70/12).
The Difference Between the Rule of 70 and Compound Interest
Compound interest is calculated from the initial principal. This includes accumulated interest from previous periods on the loan or deposit. Typically, the rate for compound interest depends on its frequency. When the number of compounding periods is higher, there is more compound interest on the future investment.
It is essential to calculate the compound interest for doubling time. That way, the number of years is known, and so is the value of the investment. Ultimately, with this rule, the investment doubles in size depending on how the interest is compounded.
Bottom Line for Minimizing Investment Taxes
The bottom line here is that people must take a strategic approach to investing to maximize retirement income and minimize taxes. In most cases, the investment can see great returns, but it's hard to determine doubling time without using the rule of 70.
It's a good idea to get a personal financial advisor to help, especially when investing a large sum such as $200,000. It could be stressful wondering how to invest 200k and they can help with that stress. With that, they should not take commissions or be given financial incentives. That way, the personal advisor is on the investor's side and isn't just out to make money.
Sometimes, investors can get a free consultation with a personal financial advisor. That way, they determine if that person is the right fit. Though it's good to find personal service at a low price, it is essential to choose someone who cares about you and offers the services required.
Economics plays a huge part in the world right now, and personal finance is essential. Growing a nest egg isn't easy. However, with practice and the right insights, growing personal finances is a possibility.
While math might not a strong suit for most people, the world of finance is not going away. Practice frugal money-saving tips, invest with the right companies for the best results, and educate yourself on financial terms such as nominal fee.
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