What is Rule of 70?

Rule of 70 Formula

In this article, we will focus on the formula for calculating the Doubling timeDoubling TimeThe doubling time formula measures the time taken by an investment to become twice its present value. Doubling Time = ln 2 / [n * ln (1 + r/n)]; where r is the rate of return and n is the number of compounding period per year.read more using the rule of 70, which is expressed as the division of 70 by the % of growth rate. Mathematically, it is represented as:

For the calculation of growth rateCalculation Of Growth RateThe Growth rate formula is used to calculate the annual growth of the company for a particular period. It is computed by subtracting the prior value from the current value and dividing the result by the prior value.read more, we need to apply the following formula:

Growth Rate (per annum) = (Amount Received on maturity subtracted by Amount Invested) divided by Amount invested thereafter multiplied by 365 days / 12 months divided by period of investment. Mathematically it can be represented as:

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Explanation

The equation for Rule of 70 can be derived by using the following steps:

Step 1: Firstly, determine the number of investments and the period of investment.

Step 2: Then, calculate the return on investment, which we got by subtracting the amount invested from the amount received on maturity called “Return.”

Step 3: Then, determine the period of investment in which we got returns or capital appreciations, i.e., the period from the date of investment to maturity called “T.”

Step 5: Finally, by using the above-mentioned formula, we can easily calculate Doubling Time. Doubling time, as calculated in step 4.

Calculate Doubling Time using Rule of 70

Let’s see some simple to advanced examples to understand it better.

Example #1

Suppose Mr. A has invested $100000 on the first day of the month in equity-oriented funds for a period of 3 months. At the time of maturity, Mr. A has received a sum of $150000. Now Mr. A wants to know the doubling time assuming all other factors in which business operates remain constant.

Solution:

Use the given data for the calculation of the rule of 70.

Then for calculation of growth rate, the following steps are to be taken:

Amount Earned on Investments = Amount Received on Maturity – Amount Invested

  • Amount Earned on Investments = $(150000-100000) = $50000.Growth Rate = ((50000/100000) * (12/3) * 100)Growth Rate = 200% per annum

Now, Calculation of Doubling Time can be done as follows,

  • Doubling Time = 70 / 200

Doubling Time will be –

  • Doubling Time = 0.35 years.

Example #2

Suppose Mr. A has invested $100000 on the first day of the month in equity-oriented funds and has earned a dividend on these investments amounting to $5000. He has also invested in 10% debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more of PQR Inc., amounting to $500000. The period of both investments is 6 months. At the time of maturity, Mr. A has received a sum of $150000 from the equity-oriented fund and $520000 from 10% debentures. Now Mr. A wants to know the doubling time assuming all other factors in which business operates remain constant, and PQR Inc. pays interest on a half-yearly basis.

  • On Equity fund = $(150000-100000) = $50000.On 10% Debentures = $(520000-500000) = $20000

Other incomes earned from investments:

  • Dividend Income = $5000Interest IncomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more on 10% Debentures = $500000*10%*6/12 = $25000Total other income and capital appreciations = $(50000+20000+5000+25000) = $100000.

Growth rate (G) can be calculated by using the above formula:

  • Growth Rate = $(100000/600000) * (12/6)*100Growing Rate = 33.33% per annum

Calculation of Doubling Time can be done as follows,

  • Doubling Time = 70 / 33.33

  • Doubling Time = 2.10 years.

Rule of 70 Calculator

You can use this rule of 70 calculators.

Relevance and Uses

  • It helps to determine the duration of investments. In other words, it helps investors to get the rough idea of “In how much time an investor got its money doubled” and for how long they have to keep investing the money.

This has been a guide to the rule of 70. Here we discuss how to calculate doubling time using its rule of 70 formula along with examples, a calculator, and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Dividend AristocratsDividend AristocratsA company is known to be to dividend aristocrats if it has consistently paid dividends to its stockholders and increased its payout of the dividend year by year for at least 25 consecutive years. These companies have robust financial health.read moreRule of 72Rule Of 72Rule of 72 is an estimated approach of calculating the time required to double the invested amount at a fixed interest rate. This is determined as a ratio of 72 to the annual interest rate. read moreCompounding QuarterlyCompounding QuarterlyThe compounding quarterly formula depicts the total interest an investor can earn on investment or financial product if the interest is payable quarterly and reinvested in the scheme. It considers the principal amount, quarterly compounded rate of interest and the number of periods for computation.read moreCompounding Calculations