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The Rule of 70 and the Rule of 72 are two popular shortcuts that can help investors quickly estimate the doubling time of an investment. These rules are particularly useful for grasping the potential growth of savings without diving into complex calculations. Both shortcuts serve a similar purpose, but they differ slightly in their application […]

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His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":826,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":{"url":"https://secure.gravatar.com/avatar/f9d67283a5124e59bce3aa419d39f0450d8c3c316c9596a42a37aa8df9e54482?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. 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","

What Is the Rule of 70?

","

The Rule of 70 is a mathematical formula used to estimate the time it takes for an investment or any quantity to double, given a fixed annual growth rate. This rule is used by investors and financial planners who want to quickly gauge the potential growth of their investments over time.

","

By dividing the number 70 by the annual growth rate percentage, you can determine the approximate number of years it will take for the initial amount to double. For example, if the interest rate is 7%, doubling will take 70 divided by 7 or 10 years. This quick and simple calculation provides a snapshot of the impact of compounding interest.

","

The Rule of 70 is a useful tool but it has limitations. For one, the rule assumes a constant growth rate, which is rarely seen in real-world scenarios. Economic conditions, market volatility and unforeseen events can all affect growth rates and make the actual doubling time longer or shorter than the rule predicts.

","

Additionally, the Rule of 70 does not account for factors such as inflation, taxes or fees, which can significantly affect the net growth of an investment. Therefore, it should be used in conjunction with other financial analysis tools.

","

What Is the Rule of 72?

","

The Rule of 72 is another way to estimate the time it will take for an investment to double in value, given a fixed annual rate of return. This rule produces useful insight without the need to delve into complex mathematical formulas.

","

By dividing 72 by the annual interest rate, investors can approximate the number of years required for their investment to grow twofold. For example, if you have an investment with an annual return rate of 6%, dividing 72 by 6 gives you 12 years for the investment to double.

","

The Rule of 72 also has limitations. Like the Rule of 70, it assumes a constant rate of return. Additionally, it is most accurate for interest rates between 6% and 10%. Outside this range, the approximation becomes less precise. The Rule of 72 can serve as a starting point, but is best complemented with more detailed financial analysis and advice from a financial advisor.

","

Major Differences of the Rule of 70 and 72

","

","

These rules are similar, but also have distinct differences that can impact their accuracy and application.

","$49","

While both the Rule of 70 and the Rule of 72 serve as valuable tools for estimating doubling time, differences in calculation basis, accuracy, historical context and application can make one more suitable than another for different scenarios. Understanding these distinctions can help you choose the right rule for your specific financial or economic analysis needs.

","

How to Know When to Use Each Rule

","

The Rule of 70 is most effective when dealing with lower growth rates, typically under 10%. It is particularly useful for long-term investments with modest growth rates, such as retirement savings or bonds.

","

The Rule of 72 is better suited for higher growth rates, typically above 10%. It is especially beneficial for evaluating investments with higher volatility, such as stocks or mutual funds, where returns can be more substantial.

","

Bottom Line

","

","

Understanding the difference between the Rule of 70 and the Rule of 72 can enhance your ability to plan your finances and devise investment strategies. Both rules serve as shortcuts to quickly and easily estimate the time it takes for an investment to double, given a fixed annual rate of return. The Rule of 70 divides 70 by the annual growth rate, while the Rule of 72 uses 72. The Rule of 72 is often preferred for its simplicity and slightly higher accuracy with common interest rates, especially those around 8%.

","

Investment Planning Tips

","$4a","

Photo credit: ©iStock.com/sanjeri, ©iStock.com/Hispanolistic, ©iStock.com/PeopleImages

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Accredited investors must meet financial criteria set by the SEC, allowing them to invest in private offerings such as hedge funds and private equity. A sophisticated investor, on the other hand, does not need to meet these financial requirements but must demonstrate sufficient knowledge and experience to evaluate investment risks. When comparing the key differences of accredited investors vs. sophisticated investors, the former face fewer restrictions, while the latter may need additional verification to participate in certain deals.

","

A financial advisor can help you select and manage your investments based on your unique investor profile. Connect with a fiduciary advisor today.

","

What Is an Accredited Investor?

","

An accredited investor refers to a person or entity that satisfies certain financial requirements established by the Securities and Exchange Commission (SEC). These investors are deemed capable of taking on higher risk investments without the regulatory protections offered to the general public. The designation primarily applies to those with a high net worth or substantial income.

","

To qualify, an individual must have an annual income of at least $200,000 (or $300,000 for joint filers) in each of the past two years, with an expectation of maintaining that income level going forward. Alternatively, they must possess a net worth exceeding $1 million, excluding their primary residence.

","

For example, imagine a software engineer who earns $400,000 annually and has a net worth over $2 million. Meeting the SEC’s financial criteria, he could qualify as an accredited investor and invest in a venture capital fund that backs early-stage tech startups.

","

Certain financial professionals, such as those holding Series 7, 65, or 82 licenses, can also qualify. Entities like trusts and corporations can also be accredited if they meet specific asset or revenue thresholds.

","

What Is a Sophisticated Investor?

","

","

A sophisticated investor is someone who possesses sufficient financial knowledge and experience to assess investment opportunities and risks effectively. Unlike accredited investors, there is no fixed income or net worth requirement. Instead, sophistication is determined by the investor’s understanding of financial markets and investment strategies, and their ability to evaluate potential risks.

","

The SEC uses this classification in contexts such as private placements under Regulation D, where issuers may accept sophisticated investors if they can demonstrate their financial literacy. This classification is subjective and often relies on the investor’s past investment experience, professional background and access to financial expertise.

","

For example, imagine a retired financial analyst who has extensive market experience but does not meet accredited investor thresholds. To invest in a private real estate syndication, they provide details of their past investments and demonstrate their understanding of risk, qualifying as a sophisticated investor.

","

Accredited Investor vs. Sophisticated Investor: Key Differences

","

Accredited and sophisticated investors both have access to certain private investments, but their qualifications and the level of access they receive differ. Differences between these classifications impact the types of opportunities available to them and the level of regulatory scrutiny involved.

","

Qualification Criteria

","

Accredited investors must meet financial thresholds set by the SEC, typically based on income, net worth or certain professional certifications. This classification assumes that individuals with substantial financial resources can afford the risks associated with private investments.

","

Sophisticated investors, on the other hand, do not need to meet financial benchmarks but must demonstrate sufficient investment experience and knowledge. This could be through prior investment activity, work in the financial sector or reliance on an advisor.

","

Access to Private Investments

","

Accredited investors have unrestricted access to private investment vehicles, including hedge funds, private equity, venture capital and certain real estate syndications. These opportunities often carry high risk and limited regulatory oversight but offer the potential for significant returns.

","

Sophisticated investors may be allowed to participate in some private placements, but investment issuers often impose additional qualification measures to ensure they understand the risks. As a result, sophisticated investors might have fewer opportunities compared to accredited investors.

","

Regulatory Protections

","

The SEC assumes that accredited investors, due to their financial standing, can take on high-risk investments without additional investor protections. They can invest in unregistered securities, which do not require the same disclosures as public investments.

","

Sophisticated investors, while recognized as experienced, do not automatically receive the same exemptions. As a result, companies offering private investments to sophisticated investors often need to provide disclosure documents and offer certain financial statement information. These firms should also be available to answer any questions that sophisticated investors may have.

","

Verification Process

","

To prove accredited investor status, individuals typically provide tax returns, bank statements, brokerage account summaries or relevant professional certifications. Some investment platforms or firms may also require third-party verification.

","

Sophisticated investors, in contrast, must demonstrate a strong understanding of financial markets, investment risks and complex financial products. This verification process can include interviews, investment history reviews or professional background checks. Unlike accredited investors, however, sophisticated investors do not have a standardized qualification process, making it more subjective.

","

Bottom Line

","

","

Private investment opportunities are not open to everyone, and different classifications determine who can participate. Accredited investors qualify based on financial standing, giving them broad access to investments like hedge funds and private equity. Sophisticated investors rely on experience and knowledge rather than specific financial thresholds, but their access is more limited and often requires additional verification. While both groups can explore private markets, the pathways differ, with accredited investors facing fewer barriers and sophisticated investors needing to demonstrate expertise.

","

Investing Tips

","$5d","

Photo credit: ©iStock.com/Petar Chernaev, ©iStock.com/SeventyFour, ©iStock.com/Artem Peretiatko

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Revenue bonds are municipal bond issued to finance specific projects like utilities, airports, or toll roads. These bonds differ from general obligation bonds because they are repaid solely from the income produced by the project, such as tolls or fees, rather than tax revenue. Investors favor them for their connection to tangible assets and a […]

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","

If you’re considering revenue bonds, a financial advisor can help you determine how they will fit into your portfolio.

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What Are Revenue Bonds?

","

Revenue bonds are debt securities issued by municipalities, government agencies or other public entities to fund specific projects that generate income. These bonds differ from general obligation bonds, as they are tied only to the revenue generated by the project they finance, such as a toll road, power plant or public transit system. Issuers do not rely on taxes to repay the bondholders but instead use income like tolls, fees or lease payments.

","

Revenue bonds are considered project-specific, meaning the success and financial viability of the funded project are key to repayment. This structure often appeals to investors who prefer a direct connection between their investment and a revenue-generating asset.

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How Revenue Bonds Work

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Revenue bonds function by earmarking specific income streams to cover interest payments and principal repayment. When an issuer sells these bonds, investors provide upfront capital, which is then allocated to the construction or improvement of the revenue-generating project. Over time, income from the project—such as utility bills, bridge tolls or ticket sales—is collected and used to make periodic payments to bondholders.

","

The repayment structure often includes a trust agreement that outlines how the generated revenue will be managed. In many cases, funds are prioritized for bond repayment before covering operational expenses. Additionally, some revenue bonds are secured by reserve funds or third-party guarantees, offering an extra layer of assurance to investors.

","

However, these bonds are not risk-free; if revenue from the project falls below expectations, the issuer might struggle to meet payment obligations. This makes due diligence on the project and its revenue projections important for investors.

","

Revenue Bonds vs. General Obligation Bonds

","

","

General obligation (GO) bonds and revenue bonds are two distinct types of municipal securities, each serving different purposes and carrying unique risks. GO bonds are backed by the taxing authority of the issuer, while revenue bonds depend solely on income generated by specific projects.

","

Below are some of the key differences between these bonds:

","$75","

Investing in Revenue Bonds

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Retail investors have several ways to buy revenue bonds, including through brokerage accounts, mutual funds specializing in municipal bonds, or directly from issuers during initial public offerings. These bonds are also available on the secondary market, allowing investors to buy and sell them at current prices. For newcomers, investing in municipal bond funds or ETFs can offer a diversified portfolio across different sectors and issuers.

","

When considering revenue bonds, it’s important to assess the financial stability and revenue potential of the project being financed. Investors should look at the project’s revenue history and forecasts, any reserves set up to protect payments to bondholders, and the bond’s credit rating from agencies like Moody’s or Standard & Poor’s, which indicates the issuer’s ability to fulfill its financial commitments.

","

Investors should also be aware of the tax implications of revenue bonds. These bonds often come with tax benefits, such as being exempt from federal and sometimes state and local taxes, which can be particularly advantageous for those in higher tax brackets. The specific tax advantages depend on the purpose of the bond and the investor’s location.

","

Bottom Line

","

","

Revenue bonds link repayment to the financial success of specific projects, offering potentially higher yields than general obligation bonds but with greater risk since repayment hinges on the project’s performance. These bonds appeal to investors looking for potential tax benefits and investments connected to real infrastructure projects. However, you should first assess the project’s revenue potential, credit rating and risks to determine whether these investments match your financial goals and risk tolerance.

","

Investment Planning Tips

","$76","

"],"experts":null,"link":"/investing/revenue-bonds","modifiedIso":"2025-01-14T15:25:58.000Z","published":{"datetime":"2025-1-14","readable":"January 14, 2025","readableExtended":"January 14, 2025, 3:25pm ET"},"publishedIso":"2025-01-14T15:25:58.000Z","shareInfo":{"title":"What Are Revenue Bonds, and How Do They Work?","origin":"/investing/revenue-bonds"},"isNewsArticle":true},{"id":"cG9zdDoyNzI5MDQ=","databaseId":272904,"postId":272904,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/3b02fac7ed4b968df109a1571de56eef337973ae16dead35422edea7ab805eb9?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1673,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ4OA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19488,"categoryId":19488,"link":"https://smartasset.com/real-estate/articles","name":"Real Estate","postCount":{"pageInfo":{"offsetPagination":{"total":162,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"real-estate","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$77","date":"2025-01-10T09:00:00","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNzI5MDc=","databaseId":272907,"altText":"A woman reading paperwork for a real estate offer.","date":"2024-12-22T17:57:06","fileSize":5047096,"mimeType":"image/jpeg","modified":"2024-12-22T18:00:28","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/01/iStock-1304727602-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-22","readable":"December 22, 2024","readableExtended":"December 22, 2024, 6:37pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/45e9da41857bacf2d253783adac5d9d20d9dbe4758f7c9712c3759bcec7a34aa?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. 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Right of first offer (ROFO) is a contractual right that gives a potential buyer the opportunity to make the first offer on a property or asset before the owner entertains bids from other parties. Typically used in real estate or business transactions, ROFO can benefit both parties. It can help the seller gauge interest. The buyer, meanwhile, has a chance to secure a deal without having to bid against other prospective purchasers. ROFOs can be employed with nearly any kind of asset and can involve leasing as well as buying.

","

A financial advisor can clarify how a ROFO functions, aiding in evaluating opportunities and risks for involved parties.

","

What Is the Right of First Offer (ROFO)?

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ROFO is a pre-emptive opportunity granted to a specific buyer to negotiate a purchase before the seller lists the asset on the open market. In essence, ROFO gives the potential buyer a first shot at making an offer, often before other interested parties are even aware of the sale.

","

This type of agreement is commonly found in real estate, business acquisitions and partnership buyouts but can be applied to other asset types as well. A ROFO clause may be included in a term sheet spelling out conditions for negotiating a proposed transaction.

","

ROFO works by giving the designated buyer a set window of time to submit an offer once the seller signals their intention to sell. If the buyer decides to make an offer, the seller can accept, negotiate or reject it. If the offer is rejected, the seller is then free to seek other buyers but typically cannot accept an offer for a lower amount or on better terms than the ROFO holder proposed.

","

This arrangement benefits buyers by providing a prioritized opportunity to secure desired assets. For sellers, it offers a smoother process for potential sales without committing to exclusive negotiations. It can help both parties in terms of setting expectations and facilitating a quicker transaction.

","

Pros and Cons of Right of First Offer

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ROFO agreements present advantages and challenges for both buyers and sellers, depending on the specific circumstances of the transaction. These agreements can influence negotiation dynamics, price discovery and the overall efficiency of the sale process.

","

Here’s a breakdown of the key pros and cons:

","

Pros

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Prioritized opportunity for buyers: Provides buyers with a prioritized chance to secure an asset without competition from other bidders before it hits the open market.
Faster transaction process: Can lead to a quicker transaction process for sellers, reducing time and effort.
Early expectation setting: Allows both parties to establish expectations early, which may simplify negotiations.
Seller flexibility: Offers sellers a way to test and encourage buyer interest without committing to complete exclusivity.

","

Cons

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Additional pressure on buyers: Buyers may feel pressured to make an offer before the asset is exposed to full market competition.
Potential lower price for sellers: Sellers may not get the highest possible price if they accept the ROFO buyer’s offer.
Complicated process if rejected: If the buyer’s offer is rejected, it can complicate the process, especially if other buyers make lower offers.
Limited seller flexibility: The seller’s flexibility may be limited, particularly if they are obligated not to accept a lower offer than the ROFO holder proposed.

","

Right of First Offer vs. Right of First Refusal

","

","

ROFO and right of first refusal (ROFR) are both contractual rights that give potential buyers an advantage, but they differ in how and when the buyer is allowed to make an offer. In a ROFO, the buyer has the opportunity to make an initial offer before the asset is offered to others, which often leads to less market competition but requires the buyer to act quickly.

","

On the other hand, a right of first refusal allows the holder to match any offer received by the seller from a third party. This means the buyer with ROFR can wait until the seller has received an offer from another party, giving them more insight into the market value but requiring a swift response to match the terms. While ROFO provides an early opportunity, ROFR provides the buyer with more information at the cost of having to compete with offers already on the table.

","

How to Use a Right of First Offer

","

From the seller perspective, using a ROFO can be broken down into six clear steps:

","$89","

Bottom Line

","

","

ROFO agreements can be practical for both buyers and sellers who are looking to streamline transactions and set clear expectations. For buyers, it provides a way to secure an asset before others are involved. For sellers, it offers a controlled and potentially faster sales process.

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Real Estate Investing Tips

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"],"experts":null,"link":"/investing/right-of-first-offer","modifiedIso":"2024-12-22T18:37:32.000Z","published":{"datetime":"2025-1-10","readable":"January 10, 2025","readableExtended":"January 10, 2025, 9:00am ET"},"publishedIso":"2025-01-10T09:00:00.000Z","shareInfo":{"title":"How Right of First Offer (ROFO) Works ","origin":"/investing/right-of-first-offer"},"isNewsArticle":true}]}]