The Rule of 70 is a handy rule of thumb used in finance to estimate the time it takes for an investment to double in value, given a fixed annual rate of return. It’s a simple calculation: divide 70 by the annual rate of return (expressed as a percentage), and you’ll get an approximation of the number of years it will take for your investment to double.
For example, if you have an investment with a 5% annual return, you would divide 70 by 5, giving you 14. This means it would take roughly 14 years for your investment to double in value.
Why does it work?
The Rule of 70 is based on the concept of exponential growth, which is the hallmark of compound interest. When you invest money, you not only earn a return on your initial investment but also on the returns generated by that investment over time. As these returns compound, they accelerate the growth of your investment exponentially.
The Rule of 70 simplifies this complex process into a single, easy-to-use formula. While it’s not precise and may yield slightly different results compared to more rigorous calculations, it provides a close approximation that’s often “close enough” for practical purposes.
When to Use the Rule of 70:
The Rule of 70 is most useful for estimating the time it takes for an investment to double at relatively low to moderate rates of return. It’s particularly handy for mental math, quick back-of-the-envelope calculations, or for gaining a rough understanding of investment growth without delving into complex financial models.
However, it’s important to recognize the limitations of the Rule of 70. It assumes a constant rate of return, which may not reflect the real-world variability of investment performance. Additionally, it’s best suited for annual compounding and may not be as accurate for other compounding frequencies.
Real-World Applications: Despite its simplicity, the Rule of 70 has practical applications in various areas of finance and investing. It can help individuals gauge the long-term growth potential of their investments, plan for retirement, evaluate the impact of different investment strategies, and make informed financial decisions.
For example, if you’re comparing two investment opportunities with different rates of return, the Rule of 70 can provide a quick estimate of how long it will take for each investment to double in value, allowing you to assess their relative attractiveness.
