Rule of 70 and 72 Explained: Calculate Investment Doubling Time

The rule of 70 and the rule of 72 are simple methods for estimating how long it takes for an investment or value to double at a given growth rate. Both work by dividing a constant, 70 or 72, by the annual growth rate, providing a quick way to calculate doubling time without complex math. Although similar, they differ in accuracy (depending on the growth rate and scenario), making each more suitable in certain situations. Examples can help illustrate how to apply these rules effectively for financial planning and growth projections.

Understanding the Rule of 70 for Investment Growth

The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.

For example, assume an investor invests $10,000 at a 10% fixed annual interest rate. He wants to estimate the number of years it would take for his investment to grow to $20,000. He uses the rule of 70 and determines it would take approximately seven (70/10) years for his investment to double.

How the Rule of 72 Helps Estimate Doubling Time for Investments

The rule of 72 is a simple method to determine the amount of time investment would take to double, given a fixed annual interest rate. To use the rule of 72, divide 72 by the annual rate of return.

For example, assume an investor invests $20,000 at a 10% fixed annual interest rate. He wants to estimate the number of years it would take for his investment to double. Instead of using the rule of 70, he uses the rule of 72 and determines it would take approximately 7.2 (72/10) years for his investment to double.

The Bottom Line

The rule of 70 and the rule of 72 are simple methods used to estimate how long it will take for an investment to double, given a fixed annual rate of return. The main difference lies in their divisor: 70 and 72, respectively. Both methods provide quick estimates, but slight differences can arise based on the divisor used, especially at lower interest rates. You can choose either rule based on your personal preference, as each offers a simple approach to understanding compound interest.