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.

‍To give a better sense of what this means in practicality, we thought it would help to run through an example: A properties ARV is $200,000 and it needs an estimated $30,000 in repairs. The 70% rule states on this occasion, that an investor should pay $110,000. ($200,000 x 70%) – $30,000 = $110,000.

Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.

The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.

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.

As a rate of return, long-term mutual funds can offer rates between 12% and 15% per year. With these mutual funds, it may take between 5 and 6 years to double your money.

Why is 70 used in the rule of 70? ›

The rule of 70 (and 72) comes from the natural log of 2 which is 0.693.. or 69.3%. Basically this is rounded to 70 (or 72) to make doing the math in your head easier. It's not 100% accurate but usually when you are asking about the doubling time of a rate by quick mental estimate, a little error doesn't matter.

The Rule of 72 can be applied to anything that increases exponentially, such as GDP or inflation; it can also indicate the long-term effect of annual fees on an investment's growth. This estimation tool can also be used to estimate the rate of return needed for an investment to double given an investment period.

The main difference is that Rule of 72 considers simple compounding interest, whereas Rule of 69 considers continuous compounding interest. Additionally, the accuracy of Rule of 72 decreases with higher interest rates. However, you can use Rule of 69 for any interest rate.

What's the “rule of 70?” The rule of 70 is an easy method of estimating how quickly a variable will double if you know its annual growth rate. If a variable is growing at a rate of x% per period, you simply take 70 and divide it by x. The rule of 70 is useful for all sorts of applications.

The rule of 70 approximates how long it will take for the size of an economy to double. The number of years it takes for a country's economy to double in size is equal to 70 divided by the growth rate, in percent.

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.

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.