The rule of 70 is a financial tool used to determine how long it will take for an investment growing at a constant rate to double in value. Financial advisors use this simple mathematical formula to compare investments when they have different growth rates. You may also see the rule of 70 referred to as doubling time.
Calculating the rule of 70
To calculate the rule of 70, take the following steps:
- Determine the investment’s annual growth rate or return rate.
- Divide 70 by the annual growth or return rate.
For example, if an investment grows at 5% per year, it would take approximately 14 years (70/5) for the investment to double in size.
Other examples:
- With a 3% annual growth rate, it could take 23.3 years for a portfolio to double (70/3).
- With an 8% annual growth rate, it could take 8.75 years for a portfolio to double (70/8).
- With a 10% annual growth rate, it could take 7 years for a portfolio to double (70/10).
- With a 12% annual growth rate, it could take 5.8 years for a portfolio to double (70/12).
What makes this simple formula so valuable is that it is easy to calculate, and it is a useful tool when you need to compare different investment options or growth scenarios.
Rule of 70 and Compound Interest
Compound interest is calculated based on the initial principal and the accumulated interest from previous investment periods. Interest can be compounded at any predefined interval. The more frequently the interest is compounded, the faster the investment will grow.
The rule of 70 enables investors to calculate how quickly an investment will double in value when given a specific compound interest growth rate (CAGR). The rule of 70 assumes continuous compounding and a constant rate of growth, a situation that rarely happens in real life. Changing economic conditions, market volatility, political changes, and other situations can all affect investment growth rates. The rule of 70 also assumes that all interest is reinvested, another unlikely circumstance. It does not account for inflation, taxes or fees, factors that affect how quickly an investment can grow.
Since compounding periods vary, financial advisors may use the rule of 69 or the rule of 72 in place of the rule of 70. Dividing by a bigger number, such as 72 instead of 70, can be more accurate for less frequent compounding periods. The rules of 70 and 72 are most accurate for calculating doubling time for investments that have an interest rate between 0.5% and 10%. It is most accurate for growth rates under 4%. When the growth rate exceeds 10%, the rule of 70 tends to underestimate the doubling time.
Rule of 70 and Negative Growth Rates
The rule of 70 can be applied to negative growth rates to determine how long it will take for an investment to be worth half its value. When using the rule of 70 with negative growth rates, divide 70 by the negative growth rate.
For example, if an investment has a -5% growth rate, it would take 14 years (70/-5) for the investment to shrink to half its value. This assumes, of course, that the negative growth rate remains constant. As with positive growth rates, this is an unrealistic assumption, as growth rates are impacted by real-world conditions such as changes in economic conditions, population dynamics, political policies, and other factors.
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Rule of 70 and Other Applications
While the rule of 70 is commonly used to calculate the doubling or halving time of an investment with a continuous growth rate, it can also be used to calculate economic growth, inflation rates, and population growth.
Economic Growth
The rule of 70 can be used to calculate how long it would take for a country to double its Gross Domestic Product (GDP) as long as the growth rate is constant and steady. Small differences in annual growth rates can make significant differences in economic growth. The rule of 70 allows economists to compare the economic growth of different countries or the same country in various periods.
Inflation
Inflation refers to the rate at which the prices of goods and services are increasing. Inflation reduces consumer purchasing power. Economists can also use the rule of 70 to determine how long it will take for a currency’s purchasing power to halve.
Population
The rule of 70 can also be used to estimate population growth. As with other applications for this simple mathematical formula, it is assumed that population growth is steady and constant.
Financial Advisor and the Rule of 70
While the rule of 70 can give you a rough idea of how long it may take for an investment with a steady growth rate to double in value, real-world factors limit its applicability. A fee-only financial advisor at Frame Wealth Management can assist you with creating a portfolio that meets your financial needs, along with advice and guidance on retirement planning, investment management, tax strategies, and other aspects of comprehensive financial planning.
Give us a call today at 866-395-1786 or contact us online to schedule a meeting and discuss your unique financial needs. Let us be your trusted partner on the path to financial success.
