The Rule of 70 is a financial term derived to determine the time it takes for the value of money to halve due to a given inflation rate. To gain an estimate of this time, financiers simply take the current inflation rate (approx 3.5%) and divide 70 by that number. Thus, 70/3.5 would give 20. This means that at 3.5% inflation it should take 20 years for the value of a dollar to halve. See also Rule of 72.
The Rule of 70 can be derived using the rule of continual growth. Since inflation is an annual term, the number of compounding periods is equal to the number of years. Rates r are initially in decimal form (3.5%=0.035), causing the need for the 100r. Then
- 2 = (er)p
implies
- pr = ln(2) = 0.7
or
- p = 0.7 / r = 70 / (100r).
See also