The Rule Of 70 and How It Is Calculated
The rule of 70 is an important rule to understand for your business. Investments are long-term means of gaining profit and accumulating wealth. Many individuals and businesses make investments to secure the future and the growth of their businesses.
However, there is nothing without risks, and this is even more applicable to investments. For instance, it may take too long for an investment to yield the desired profit. Knowing the amount of time it will take for an investment to double can go a long way in reassuring the investor about their investment viability. This is where the rule of 70 comes in.
What Is The Rule Of 70?
It is a means of estimating the amount of time (years) it takes for investment or money to yield. This rule is a mathematical calculation that helps determine how long it will take for your investment to double at a specified return rate. It is also referred to as Doubling Time.
Note that the rule of 70 is a rough estimate and is more of a prediction, but it gives investors an idea of the number of years it takes for an investment to double. It helps to guide issues of compounding interest and exponential growth.
However, it is essential to note that it is best applied in situations where steady growth is expected over a long time. In cases where spontaneous growth is desired, the rule of 70 cannot be used.
How To Calculate
To calculate this rule, you must first know or estimate the annual rate of return or growth rate. The rule of 70 is then calculated using a simple and straightforward formula.
The formula for calculating the number of years it will take for an investment to double using the rule of 70 is :
Number of years it will take to double = 70 ÷ annual growth rate
Let’s have a look at an example;
A company has invested with an annual return rate of 10%, and they want to know how many years it will take to double this investment. Using the rule of 70;
The number of years = 70÷10
= 7
Thus, it will take seven years for their investment to double at a 10% growth rate. This means that without a specific annual rate of return or growth rate, the rule of 70 cannot be applied.
Application for Businesses
Businesses can apply the rule of 70 in determining the possible values of their investments in the future. For individual investors, it can be useful to evaluate funnel returns and growth rates on investments. These investments can be stocks, bonds or a group of assets in a retirement portfolio.
Knowing How To Grow A Portfolio Faster
A portfolio is a collection of assets (in this case, investments). With the rule of 70, investors and businesses can use it to know or estimate new acquisitions to add to their existing portfolio to make it grow even faster.
Like in the example of the company above, let’s say they expect to double their investments in 5 years instead of 7 as estimated using the rule of 70. They will know how to adjust the time it takes to double their investments by making more investments at an annual growth rate or investment rate return, enabling them to double the number of their collective assets in five years, as desired.
Generally, this rule enables businesses and investors to calculate growth rates without complex formulas and calculations. However, the rule of 70 is limited because it includes estimated growth rates and generates inaccurate results as it can forecast future growth.
Other Doubling Rules
As the rule of 70, there are also the rule of 72 and the rule of 69. They (including the rule of 70) are all used to calculate the number of years it will take for an investment to double.
But in the place of 70, as shown in the formula, 72 and 69 are used to make the calculations. However, the rule of 72 is reportedly more accurate in cases of less frequent compounding intervals, while 69 is said to be more precise in instances of continuous compounding processes.
The Rule of 70 vs Compound Interest
It may be easy to assume that this rule and compound interest are similar, but this is, in fact, false. Compound interest is the accumulated interest calculated on the initial principal (capital or investment in this context) over some time. While on the other hand, the rule of 70 only gives a rough estimate of the number of years it will take for the capital to double.
They, however, go hand in hand. Compound interest is crucial in estimating long-term growth rates of investments and also the rules of doubling. This means that interest earned should be reinvested so that the number of years it will take for the investment to double will be lesser. If the interest earned is not reinvested, it will take a long time for investment, money or a portfolio to double.
A macroeconomic tool for predicting a business’s future growth or investment based on present and steady annual growth rates, the rule of 70 is a simple and straightforward calculation that gives companies and investors a rough idea of how long it will take for their investments to double.
It helps them prepare better for the future and gives them insights on how to improve their assets. Although it has its limitations, the rule of 70 is a tool, every business or investor should try out.
We write helpful business articles to help you succeed. Dive into more blog posts for wonderful tips!