How to Calculate the Rule of 70: Limitations to the Rule of 70

The rule of 70, also known as doubling time, is a formula that offers investors the ability to estimate the time frame in which a variable will double based on its annual growth rate, or rate of return. The rule provides investors with a rough estimate of exponential growth over a certain amount of time and works best when the annual rate of growth remains unchanged. To determine the amount of time that it will take for an investment to double using the rule of 70, divide the annual rate of return by 70.

You can apply the formula to many different scenarios, including macroeconomics, like world population growth, inflation rates, and gross domestic product (GDP) growth. However, the rule is most commonly used as a tool to roughly estimate the future value of an investment by determining the number of years needed to double it.

In addition to the rule of 70, two other formulas are used to measure doubling time: the rule of 69 and the rule of 72, which follow the same essential formula as the rule of 70, except the growth rate is divided by 69 or 72 respectively, instead of 70. These rules are more accurate when measuring investments with compound interest, or interest generated by an investment that is then added or reinvested into the original principal amount.

There are some limitations to the rule of 70, the most significant being that the formula only provides a rough idea on doubling time.

Additionally, the rule is most effective if the current growth rate is consistently the same. If growth rates or annual interest rates change in any way, it will not generate an accurate estimate.

Calculating the rule of 70 is a straightforward two-step process:

• Determine the annual rate of return. First, determine the annual rate of return for your investment, which will serve as the divisors for your rule of 70 formula. For example, if your retirement portfolio saves money at a rate of five percent per annum (for each year), divide the formula by five. If your growth rate is shown as a decimal, multiply that number by 100 to get the percentage.
• Divide it by 70. In the rule of 70, the “70” represents the dividend or the divisible number in the formula. Divide your growth rate by 70 to determine the amount of time it will take for your investment to double. For example, if your mutual fund has a three percent growth rate, divide 70 by three. Thus, the doubling time is 23.33 years because 70 divided by three is 23.33.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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