Rule of 70 Vs. Rule of 72: Definition, How They Work, and Example (2024)

FAQs

Rule of 70 Vs. Rule of 72: Definition, How They Work, and Example? ›

The rule of 72 is best for annual interest rates. On the other hand, the rule of 70 is better for semi-annual compounding. For example, let's suppose you have an investment that has a 4% interest rate compounded semi-annually or twice a year. According to the rule of 72, you'll get 72 / 4 = 18 years.

The Rule of 70 Formula

Hence, the doubling time is simply 70 divided by the constant annual growth rate. For instance, consider a quantity that grows consistently at 5% annually. According to the Rule of 70, it will take 14 years (70/5) for the quantity to double.

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. When using the rule of 70, the number 70 is used in the calculation. Likewise, when using the rule of 72, the number 72 is used in the calculation.

The reason why the rule of 70 is popular in finance is because it offers a simple way to manage complicated exponential growth. It breaks down growth formulas into a simple equation using the number 70 alongside the rate of return.

Explanation of the Rule of 70

The formula is as follows: Take the number 70 and divide it by the growth rate. The result is the number of years required to double. For example, if your population is growing at 2%, divide 70 by 2. The result is 35; it will take 35 years for your population to double at a 2% growth rate.

When buying a home to flip, investors need to estimate how much they believe the property could sell for after it's been renovated. They can then multiply that amount by 70% and subtract it from the estimated cost of renovating the property.

The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 6, 8, 9, and 12. It provides a good approximation for annual compounding, and for compounding at typical rates (from 6% to 10%); the approximations are less accurate at higher interest rates.

The “rule of 72” is one milestone that lets you quickly assess the progress you're making toward big-picture financial goals. It is a mathematical formula that enables you to see how long it will take to double your money at a given rate of return.

In brief, the rule of 72 allows you to calculate a good approximation to how long it will take for your money to double at any compound interest rate. The doubling time is derived by dividing the interest rate into 72. So at 6% your money will double in 12 years, at 9% in 8 years, etc.

What is the Rule of 72 in simple terms? ›

Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

Advantages and Disadvantages of Rule of 72

However, the Rule of 72 is based on a few assumptions that may not always be accurate, such as a constant rate of return and compounding period. It also does not take into account taxes, inflation, and other factors that may impact investment returns.

This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.

According to the rule of 72, you'll get 72 / 4 = 18 years. If you use the rule of 70, you'll get 70 / 4 = 17.5 years. Finally, if you do the original logarithm calculation, it'll actually take you about 17.501 years to double your money. So, the rule of 70 is a better estimate.

But what is the Rule of 70? If a variable is growing at a rate of x% per period, you can calculate how quickly it will double by taking 70 and dividing it by x, the growth rate. For example, suppose you have money in an investment account that has an annual rate of growth of 5% per year.

The 70% rule for retirement savings can help you estimate the amount of income you may need in retirement. It says you'll need 70% of your pre-retirement, post-tax income to retire comfortably.

If a variable is growing by x% per period, the doubling time would equal approximately: 70 ÷ x periods. In order for a certain variable to double in N years, the growth rate of that variable must be approximately: 70 ÷ N% per year.

To calculate this, you would use the rule of 70. This rule calculates the doubling time by dividing 70 by the growth rate. You might notice this is quite similar to the rule of 72, which has you divide the number 72 by the annual rate of return.