What Is the Rule of 70? - The Balance

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 ... TheBalance Investing WhatIstheRuleof70? TheRuleof70ExplainedinLessThan5Minutes ••• AlistairBerg/GettyImages TableofContents Expand TableofContents DefinitionandExamplesoftheRuleof70 HowtheRuleof70Works DoINeedtheRuleof70? TheRuleof70:Alternatives ProsandConsoftheRuleof70 By JacquelineDeMarco FullBio LinkedIn JacquelineDeMarcohas7+yearsofexperienceresearchingandwritingdozensofarticles.Shecoversinvesting,taxes,creditcardsandscores,loans,banking,budgeting,andmoreforTheBalance.JacquelinehasbeenpublishedonLendingTree,CreditKarma,Fundera,Chime,MagnifyMoney,StudentLoanHero,ValuePenguin,SoFi,NorthwesternMutual,andmore. Learnaboutour editorialpolicies UpdatedNovember24,2021 Reviewedby RobertC.Kelly Reviewedby RobertC.Kelly FullBio RobertKellyismanagingdirectorofXTSEnergyLLC,andhasmorethanthreedecadesofexperienceasabusinessexecutive.Heisaprofessorofeconomicsandhasraisedmorethan$4.5billionininvestmentcapital. Learnaboutour FinancialReviewBoard Theruleof70isasimplemathematicalformulathatcanbeusedtoapproximatehowlongittakesforaninvestmenttodoubleinvalue.It’ssimilartotheruleof72andtheruleof69,buthasslightlydifferentapplications. Let’sexaminewhattheruleof70is,howitworks,andhowit’susedtoestimateaninvestment’slong-termreturns.  DefinitionandExamplesoftheRuleof70 Investorstypicallyusetheruleof70topredictthenumberofyearsittakesforaninvestmenttodoubleinvaluebasedonaspecificrateofreturn(aninvestment’sgainorlossoveraperiodoftime).  Theruleof70iscommonlyusedtocompareinvestmentswithdifferentannualinterestrates.Thismakesitsimpleforinvestorstofigureouthowlongitmaybebeforetheyseesimilarreturnsontheirmoneyfromeachoftheinvestments.  Let’ssayaninvestordecidestocompareratesofreturnontheinvestmentsintheirretirementportfoliotogetanideaofhowlongitmaytaketheirsavingstodouble.Tocalculatethedoublingtime,theinvestorwouldsimplydivide70bytheannualrateofreturn.Here’sanexample:  Ata4%growthrate,itwouldtake17.5yearsforaportfoliotodouble(70/4)Ata7%growthrate,itwouldtake10yearstodouble(70/7)Atan11%growthrate,itwouldtake6.4yearstodouble(70/11)Alternatename:Doublingtime  HowtheRuleof70Works Nowthatyou’veseentheruleof70inaction,let’sbreakdowntheformulasoyouunderstandhowtoapplytheruleof70toyourowninvestments.  Again,calculatingtheruleof70isprettystraightforward.Allyoudoisdivide70bytheestimatedannualrateofreturntofindouthowmanyyearsit’lltakeforaninvestmenttodoubleinsize.Forthecalculationtoworkproperly,you’llneedtohaveatleastanestimateoftheinvestment’sannualgrowthorreturnrate. DoINeedtheRuleof70? Keepinmindthattheruleof70isaroughestimate,butitcancomeinhandyifyouwantamoreconcretewayoflookingatthepotentialofaretirementportfolio,mutualfund,orotherinvestmentthantheinterestratealonecouldprovide.Knowingthenumberofyearsitcouldtaketoreachadesiredvaluecanhelpyou planwhichinvestmentstochooseforyourretirementportfolio,forexample.  Let’ssayyouwantedtopickaprecisemixofinvestmentswiththepotentialtogrowtoacertainvaluebythetimeyouretirein20years.Youcouldusetheruleof70tocalculatethedoublingtimeforeachinvestmentunderconsiderationtoseeifitcouldhelpyoureachyoursavingsgoalsbythetimeyouretire.  Theruleof70hasotherapplicationsoutsideoftheinvestmentspace.Forexample,theruleof70canbeusedtopredicthowlongitwouldtakeforacountry'srealGDPtodouble.  AlternativestotheRuleof70 Theruleof69andtheruleof72aretwoalternativestotheruleof70.Theydifferintheiraccuracyforinvestmentswithdifferentcompoundingfrequencies(whichmeasurehowoftenyourinterestcompounds).Bothcalculationsfunctionsimilarlytotheruleof70,excepttheydividetheannualrateofreturnby69and72,respectively,toderivethedoublingtime. Ingeneral,theruleof69isconsideredtobemoreaccurateforcalculatingdoublingtimeforcontinuouslycompoundingintervals,especiallyatlowerinterestrates.Theruleof70isdeemedmoreaccurateforsemi-annualcompounding,whiletheruleof72tendstobemoreaccurateforannualcompounding.  ProsandConsoftheRuleof70 Whiletheruleof70hassomeimpressivebenefits,italsohassomedownsides:  Pros Cons Stronginvestmentgrowthpredictionmodel Onlyanestimate Straightforwardformula  Reliesonflawedassumptions  ProsExplained Stronginvestmentgrowthpredictionmodel.Theruleof70makesiteasytoestimatethenumberofyearsitmaytakeforaninvestmenttodoubleinvalue.Straightforwardformula.Tousetheruleof70,allyouhavetodois divide70bytheannualrateofreturn. ConsExplained Onlyanestimate.Whiletheruleof70canprovideawell-informedprojectionofhowlongitmaytakeaninvestment’svaluetodouble,thecalculationisonlyanestimate.Inaddition,thatestimatecanbethrownoffbyfluctuatinggrowthrates.  Reliesonflawedassumptions.Anotherreasontheruleof70isn’talwaysaccurateisbecauseitassumesaninvestmentcompoundscontinuously.However,mostfinancialinstitutionscalculateinterestlessfrequently,sothisassumptionisinherentlyflawedwhenitcomestotheruleof70anditsabilitytoaccuratelypredictgrowth.(Theruleof69maybemoreaccurateforcontinuouslycompoundinginvestments.) KeyTakeaways Theruleof70isabasicformulausedtoestimatehowlongitwilltakeforaninvestmenttodoubleinvalue.Tousetheruleof70,simplydivide70bytheannualrateofreturn.Theruleof70onlyprovidesanestimate,notaguarantee,ofaninvestment’sgrowthpotential. ArticleSources  TheKelleyFinancialGroup.“WhatIstheRuleof70?”AccessedAug.19,2021. TheKelleyFinancialGroup.“WhatIstheRuleof70?”AccessedAug.19,2021. CorporateFinanceInstitute.“WhatIstheRuleof72?”AccessedAug.19,2021. Robinhood.“WhatIstheRuleof72?”AccessedAug.19,2021. Share Tweet Share Email WhatIstheRuleof72? Retiringat70?ConsiderThese7TipsonHowtoMakeSteadyMoney HowThisSimpleInvestmentRuleCanHelpYouIncreaseYourWealth HowToCalculatetheGDPGrowthRate WhatIsCompoundInterest? HowandWhentoGetMoneyOutofYour401(k)orIRA TheBestRetirementCalculatorsAvailableOnline WhatIsRateofReturn(RoR)? Top401(k)PenaltiesThatCanHurtYourRetirementNestEgg DeterminingaSafeRetirementWithdrawalRate WhatIstheGrossRateofReturn? ShouldYouMakeAfter-TaxContributionstoYourRetirementPlan? WhatIsMarketCapitalization? WhatIstheSharpeRatio? WhatIsWeightedAverageLife? HowLongtoDoubleYourMoney?UsetheRuleof72.