The rule of 70 is an easy way to calculate how many years it will take for an investment to double in size. There are much more sophisticated and accurate ways to make the calculation, but many investors use the rule of 70 for quick estimates.
The formula for the rule of 70 is to take the number 70 and divide it by the investment’s rate of return. For calculations involving an investment, the rate is usually a stated rate that takes annual compounding into account.
For instance, Fred deposits $5,000 in a savings account earning 5% interest. Using the rule of 70, it will take 14 years (70/5) before Fred’s $5,000 doubles to $10,000.
The rule of 70 is also used to estimate when a country’s economy will double in size. If a country’s GDP is $1 billion and has a projected growth rate of 3.5%, then that country will reach a $2 billion GDP in 20 years (70/3.5). Knowing this number encourages the country’s leaders to take steps to increase their annual growth rate should they want to reach a $2 billion GDP in a shorter timeframe.
When used with the rate of inflation, the rule of 70 can also estimate when a currency’s value will halve. For instance, if the inflation rate is 2.5% in a particular country, then the standard monetary unit of that country will halve in purchasing power in approximately 28 years (70/2.5).
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