If You’ve Mastered the Magic of 72, You’re Ready to Seize the Secret of 70!
Posted July 6th, 2016.
Categories: The Calculating Lawyer.
Yesterday I spoke about the Rule of 72, a convenient rule of thumb for calculating how long it will take to double your money (or your client’s money) invested in a particular project or purchase. If you missed yesterday’s blog, I encourage you to check it out. You’ll need to give yesterday’s blog a quick read to make sense of today’s blog.
Once you’ve mastered the magic of the Rule of 72, you’re ready to seize the simplicity of the Rule of 70.
The Rule of 70 is a variation of the Rule of 72 and works the same way. In order to determine how long it will take to double an investment, simply divide the rate of return into 70. Using 70 as a numerator will produce somewhat more accurate results than the Rule of 72 when interest is compounded daily.
Choosing between the Rule of 72 and the Rule of 70 may depend on simple convenience when making rule-of-thumb estimates without the benefit of a financial calculator. The Rule of 72 will produce easy-to-calculate results when the interest rate matches one of the small divisors (numbers that divide easily into 72 as whole numbers). These include 1, 2, 3, 4, 6, 8, 9 and 12. So, for example, if the interest rate is 9%, the Rule of 72 produces the quickest answer – it will take eight years for any given investment to double.
The Rule of 70 is the better choice, however, when the interest rate matches one of the divisors for the number 70 (1,5,7,10 and 14). A $1,000 investment with a 7% rate of return would take about 10 years to double, a calculation quickly made with the Rule of 70 (as opposed to the Rule of 72).
One of the virtues of these rules is that the amount of money in question is irrelevant to the ratio. An investment of $245,632.01 at 7% would still take about 10 years to double based on the Rule of 70, regardless of the complexity of the exact amount of the funds being invested.