The rule of 70 is used to determine about how long it will take an investment to double in size while growing at a consistent rate of return. The rule is far from exact, but it can nonetheless help you figure out the approximate future value of an investment or compare the potential value of two investments with different rates of return. You may also see the rule of 70 called the “doubling time” of an investment.
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How to Calculate the Rule of 70
The rule of 70 is used to estimate the time that it will take for an investment or portfolio to double in size. In short, it’s really just a simple math equation.
To start, find the annual rate of growth of the investment in question. Then, divide that growth rate into 70, which is where this rule gets its name. The number you’re left with is approximately the number of years that it will take your investment to double in size. Here’s the equation:
70 ÷ your investment’s annual growth rate = the number of years until your investment doubles
Below are a few examples of how the rule of 70 works in practice:
|Examples of the Rule of 70|
|Dividend||Annual Growth Rate||Investment Doubles in…|
When Is the Rule of 70 Useful?
The rule of 70 has many applications, though it’s typically used to approximate the doubling time of an investment. These investments could be stocks, bonds or a group of investments within a retirement portfolio. For instance, an investor might use the rule of 70 to determine what new types of investments to add to a portfolio in order to get it to grow even faster.
The rule of 70 also allows investors to estimate growth rates without having to do complex math. While you’re ultimately left with just a guess, it’s significantly easier than doing other more rigorous equations to estimate things only slightly more accurately.
It’s also important to note that the rule of 70 works best if growth rates basically remain the same. If an investment has a constantly fluctuating growth rate, the rule of 70 may be somewhat inadequate. However, you can also plug the investment’s average growth rate into the equation for a more accurate answer.
The Rule of 70 vs. the Rule of 72
The rule of 70 and the rule of 72 are nearly the exact same equations. In fact, the only difference between them is the dividend that’s used. As you might expect, the rule of 72 uses “72” as the dividend, whereas the rule of 70 uses “70.”
Because the rule of 72’s dividend is larger than its counterpart, its projections for when an investment will double by are always longer. Neither rule is considered to be more superior than the other, as investors largely use both.
While the rule of 70 can’t offer a perfect projection, it’s still a helpful tool for figuring out the future value of an investment or set of investments. This is especially true when you’re comparing two similar investments that have different growth rates. The rule of 70 easy to calculate and can provide much needed insights for many potential or current investments.
Tips for Investing
- Working with a financial advisor is a good way to make sure you’re putting your best foot forward when it comes to investing your hard-earned money. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in just five minutes. Get started now.
- For a more accurate answer about your investment returns, visit SmartAsset’s investment calculator. All you need to know is your starting and contribution amounts, rate of desired return and time horizon.
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