What is the Rule of 70?
The rule of 70 is a quick rule of thumb which is used to determine how long something which is growing at an exponential rate will take to double. It can be used to find out how many years it will take for an investment to double, when a nation's gross domestic product (GDP) can be anticipated to double at a given growth rate, and so forth. Closely related are the rules of 69 and 72, which rely on the same basic formula as the rule of 70, with a different number plugged in.
According to the rule of 70, it is possible to find out how many years it will take for something to double by dividing the number 70 by the rate of growth. For example, if someone deposits some money in the bank at an interest rate of 5%, it would take 14 years for the investment to double, because 70 divided by 5 equals 14. Likewise, if a country is experiencing a GDP growth rate of 14%, it would take five years for the nation's GDP to double — and that country would be the envy of much of the world. The actual rate of doubling can vary slightly, which is why people sometimes prefer to use 69 or 72 instead of 70.
Another way in which the rule of 70 can be used is to look at ways in which the purchasing power of currency will change in response to inflation. If a country had an inflation rate of 10%, for instance, it would take seven years for currency to be worth half as much. For example, if $20 United States Dollars (USD) were needed to buy a widget in 2030, and the United States had a consistent inflation rate of 10%, $40 USD would be required in 2037.
Things like interest rates, inflation, and other rates of growth rarely remain conveniently static as they have in the examples above. As a result, the rule of 70 is not always completely reliable. These rates can change, throwing the calculation off. This rule does provide a quick reference which people can use when making decisions, however. It can also be useful for illustrating the way in which exponential growth works to people who are exploring options for bank accounts earning different amounts of interest or who are trying to figure out how to apply payments to debts, such as credit cards, most efficiently.
One of the major problems with this is that the model assumes the rate of growth will remain constant. Things rarely work out that way. In terms of predictions, then, the Rule of 70 is flawed, but that should be no surprise -- growth rates tend to fluctuate wildly.
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