In order to quickly calculate how long it would take an investment to grow, the approach is frequently employed to contrast investments with various annual compound interest rates. Double-time is another name for the rule of 70. Calculating the doubling time is useful for purposes of estimating even though the findings won’t be absolute.
This calculation’s outcomes are frequently used to contrast various investments if each investment has a different return rate, you can apply this rule to decide which will allow your money to double the quickest.
When to use the rule of 70
Most of the investments may be made using the doubling time rule. It is widely applied when contrasting growth rates for investment portfolios or mutual funds. Considering long-term value, it is generally used in retirement portfolios. Investors want assurance that their money will generate enough earnings within a specific time frame. The rule of 70 is well-known in finance because it provides an approach that is simple for controlling complex exponential development. It simplifies growth equations by employing the number 70 together with the return rate. In order to compare growth rates in different economies, this concept can be used to determine how long it takes for a country’s GDP to double.
Formula
The uncomplicated equation can be used to determine how long investments take to double. To start, you must first comprehend the investment’s annual increased rate. Then, using the doubling time rule, divide 70 by this increased rate. Here is an equation representation of how it appears.
Time-doubling formula
Time to Double = 70 / Annual Growth Rate
Your money will double over the course of the number of years determined by the result.
Rule of 70 and compound interest
When projecting the future growth of an investment, compound interest is an important factor that needs to be taken into account. This is interest that has been accrued over time on a starting or principal sum. The interest does not always constant. It contains accrued interest from earlier times. Compound interest increases with the number of periods. This will have an impact on length of time required to double your, thus the rule of 70 should be considered.
Limitations
Usually, the rule of 70 is highly effective. The rule is typically very powerful. But for a variety of reasons, the given answer isn’t entirely accurate. This method has issues because it assumes compounding will continue. Consequently, interest is continually determined and then added to account. Small annual growth rates make the gap undetectable, but bigger rates, like 10% or more, make the difference clear. Additionally, these calculations could change if the balance of account changes, especially if there are sizable withdrawals. or deposits during the calculation period. It’s a good idea to constantly update your calculations because the return rate fluctuates. The 70 percent rule and its doubling rule both infer growth or return on investment estimates in some manner. As a result, unreliable results are possible.
Pros:
Reliable way for estimating investment growth: Using the rule of 70, it is easy to determine how long it might take to double the investment.
Simple calculation: To apply the rule , simply divide 70 by the yearly rate of return.
Cons:
Only an estimate: The computation is merely an estimate, even though the rule of 70 can give a knowledgeable forecast of how long it might take for an investment’s value to double. Additionally, shifting growth rates have the potential to deviate from that forecast.
It is based on false assumptions: The fact that this rule presumes an investment compound continually is another reason why it isn’t always accurate.
Here we explained the rule of 70, its application, formula, limitation, pros, and cons. You can quickly determine length of time required to duplicate your initial investment by using the rule of 70. When comparing different assets, is especially helpful because it offers insightful information. The rule of 70 can be used to handle problems with compound interest and exponential growth even though it is not a perfect estimate. That holds true for any asset whose long-term and future growth is anticipated to be steady. One excellent one is the gradual increase in population. The rule of 70 doesn’t work well in situations when it is expected that growth rates will vary greatly, though.
- What are the Examples of the Rule of 70?
Ans. Here are several computations made using this rule and varied growth rates:
It would take 17. 5 Years for a portfolio to double, with a 4 percent growth rate (70/4). It would take 7. 77 years to double, with a 9 percent growth rate(70/9)It will take 6. 36 years to double, with an 11 percent growth rate(70/11)It takes 5. 38 years to double, with a 13 percent growth rate(70/13)
- What alternatives exist to the rule of 70?
Ans. Rule of 69 and Rule of 72 are two variants of the Rule of 70. They are almost correct for investment with varying compound frequencies. In these computations, the yearly rate of return is divided by 69 or 72, respectively, to determine the doubling time, much like this rule
