What is the ‘Rule of 70’ in finance?
The world of finance is filled with rules, formulas, and calculations that help individuals and organizations make informed decisions about their money. One such rule is the “Rule of 70,” which is used to estimate the future buying power of money. In this blog post, we will delve into the details of the Rule of 70, its significance, and how it can be applied in real-life scenarios.
The Rule of 70 is a simple yet powerful tool that helps individuals understand the impact of inflation on their money. It states that dividing 70 by the inflation rate shows how many years it will take for the value of money to halve. For example, if the inflation rate is 4%, dividing 70 by 4 gives us 17.5 years. This means that at an inflation rate of 4%, something that costs ₹100 today would cost about ₹200 in 17.5 years, resulting in the rupee losing half of its purchasing power.
To illustrate this concept further, let’s consider a few more examples. If the inflation rate is 5%, dividing 70 by 5 gives us 14 years. This means that at an inflation rate of 5%, something that costs ₹100 today would cost about ₹200 in 14 years. On the other hand, if the inflation rate is 3%, dividing 70 by 3 gives us 23.33 years. This means that at an inflation rate of 3%, something that costs ₹100 today would cost about ₹200 in 23.33 years.
The Rule of 70 is an essential concept in finance because it helps individuals understand the importance of inflation and its impact on their money. Inflation is a sustained increase in the general price level of goods and services in an economy over time. It can erode the purchasing power of money, reducing the value of savings and investments. By using the Rule of 70, individuals can estimate the future buying power of their money and make informed decisions about their financial planning.
For instance, suppose an individual has ₹1 lakh in savings and wants to know how much it will be worth in 10 years, assuming an inflation rate of 4%. Using the Rule of 70, we can calculate that at an inflation rate of 4%, the value of money will halve in 17.5 years. This means that in 10 years, the ₹1 lakh will be worth approximately ₹58,000 in today’s money, assuming the same inflation rate.
The Rule of 70 is also useful for investors who want to estimate the returns on their investments. By using the Rule of 70, investors can calculate the required rate of return on their investments to keep pace with inflation. For example, if an investor wants to maintain the purchasing power of their money, they would need to earn a return of at least 4% per annum, assuming an inflation rate of 4%.
In addition to the Rule of 70, there are other rules and formulas in finance that can help individuals make informed decisions about their money. For example, the Rule of 72 is used to estimate the number of years it takes for an investment to double in value, based on the interest rate or rate of return. Another example is the 50/30/20 rule, which suggests that individuals should allocate 50% of their income towards necessary expenses, 30% towards discretionary spending, and 20% towards saving and debt repayment.
In conclusion, the Rule of 70 is a valuable tool in finance that helps individuals estimate the future buying power of money. By understanding the impact of inflation on their money, individuals can make informed decisions about their financial planning, investments, and savings. Whether you’re a seasoned investor or just starting to plan your finances, the Rule of 70 is an essential concept to keep in mind.
For more information on personal finance and money rules, you can visit https://www.news18.com/amp/business/savings-and-investments/from-rule-of-72-to-20x-life-insurance-9-must-know-money-rules-for-financial-security-ws-l-9554756.html
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