What is the ‘Rule Of 70’
The rule of 70 is a way to estimate the number of years it takes for a certain variable to double. To estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it takes to double your money.
BREAKING DOWN ‘Rule Of 70’
Another useful application of the rule of 70 is in the area of estimating how long it would take a country’s real GDP to double. Similar to calculating compound interest rates, a person can use the GDP growth rate in the divisor of the rule. For example, if the growth rate of China is 10%, the rule of 70 predicts it would take seven years, or 70/10, for China’s real GDP to double.
The rule of 70 is accepted as a way to manage exponential growth concepts without complex mathematical procedures. Also referred to as doubling time, it is most often related to items in the financial sector in instances when examining the potential growth rate of an investment. By dividing the number 70 by the expected rate of growth, or return in financial transactions, an estimate in years can be produced.
While it is not a precise estimate, the rule of 70 formula does help provide guidance when dealing with issues of compounding interest and exponential growth. This can be applied to any instrument where steady growth is expected over the long term, such as with population growth over time, but it is not well applied in instances where growth rate is anticipated to vary dramatically.
Rules of 72 and 69
In some instances, the rule of 72 or the rule of 69 is used. The function is the same as the rule of 70 but uses the number 72 or 69, respectively, in place of 70 in the calculations. While the rule of 69 is often considered more accurate when addressing continuously compounding processes, 72 may be more accurate for less frequent compounding intervals. Often, the rule of 70 is used simply because it may be easier to remember.
Rule of 70 vs. Real Growth
The population of the United States was estimated at 161 million in 1953, approximately doubling to 321 million in 2015. In 1953, the growth rate was listed as 1.66%. By the rule of 70, the population would have doubled by 1995. Changes to the growth rate lowered the average rate, making the rule of 70 calculation inaccurate.