Saving money for your future is almost always a great choice. But merely throwing your money into a savings account probably isn’t going to be enough. The interest rates in savings accounts are notoriously low. While they can sometimes be a good choice, other investment options such as CD or money market account will often give you a higher rate of return.
But if you have a goal to save a certain amount of money by a specific time, it can be challenging to figure out what interest rate you need to get or how much you need to start with to reach your goal. You can use the Rule of 70 to help you make decisions about your investments.
What is the Rule of 70?
The Rule of 70 is a simple mathematical formula that can help you estimate how long it will take your investment to double. It uses the interest rate to estimate this length of time. It won’t give you a perfectly exact number, but it’s much easier to use than compounding interest formulas and is also easy to remember! It’s fairly accurate as well, making it a helpful tool when you’re planning your investments.
How to calculate using the Rule of 70
In order to calculate the Rule of 70, you need to know the annual interest rate of your investment. That’s it!
The formula is 70 divided by x, where x equals your interest rate. Use the percentage instead of the decimal (example: use 4 for 4% interest instead of using 0.04).
When we use the formula, we see that if we invest at 4% interest it will take about 17.5 years for our money to double.
How can you use the Rule of 70 to invest
Calculating using the Rule of 70 can help you decide if your investment is a good choices for your financial goals. For example, if you find out that your money will double in 18 years and you’d like it to double sooner, you can continue searching for a higher rate of return to better align with your goals.
Checking the formula
How accurate is the Rule of 70? Let’s check it using a standard compounding interest formula.
If we invest $100,000 at a 4% interest rate, according to the Rule of 70 we will have $200,000 in about 17.5 years.
We can also use the compounding interest formula to estimate how much $100,000 will become in 17.5 years when it’s invested at 4%. The formula is A = P (1 + r/n) (nt)
A = the future value of the investment
P = the principal investment amount
r = the annual interest rate in decimal form
n = the number of times that interest is compounded per unit t
t = the time the money is invested for
Using this formula, with interest compounded monthly, we come up with the amount of $201,140.99 after investing $100,000 for 17.5 years at 4%. Pretty amazing, right? The Rule of 70 is much easier to calculate and resulted in almost the exact same number.
Limitations of the Rule of 70
The Rule of 70 isn’t exact. If the interest rate of your investment fluctuates, this formula won’t give you a very accurate prediction. If you plan to add money to the investment over time, also, this formula may not be very helpful for you.
If it’s important to you to know the exact amount of time it would take to double your money, you can always use a calculator and the compounding interest formula.
Alternatives to the Rule of 70
You may have heard of the Rule of 69.3 or the Rule of 72. These are alternatives to the Rule of 70, but the principle remains the same. Using 69.3 will give you the most accurate estimate, while using 72 might make it a bit easier to do the mental math. The numbers will be fairly similar, though. We can compare the three formulas using the 4% interest rate from above.
69.3 /4 = 17.325 years
70 / 4 = 17.5 years
72 / 4 = 18 years
There isn’t much difference, time-wise, between these three formulas, and they all provide a good estimate of how long it will take for your money to double at a certain interest rate.
The Rule of 70 is a good way to take some of the guesswork out of investing, especially if you don’t have a calculator handy or complicated formulas memorized.