What is the ‘Rule of 70’ in finance?
The world of finance is filled with various rules and formulas that help individuals 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 simple terms, it helps you understand how inflation can erode the value of your money over time. In this blog post, we will delve into the details of the ‘Rule of 70’ and explore its significance in personal finance.
The ‘Rule of 70’ is a simple yet powerful formula that calculates the number of years it takes for the value of money to halve due to inflation. It’s calculated by dividing 70 by the inflation rate. For instance, if the inflation rate is 4%, dividing 70 by 4 gives you 17.5 years. This means that if something costs ₹100 today, it would cost approximately ₹200 in 17.5 years, assuming a constant inflation rate of 4%. In other words, the rupee would lose half of its purchasing power in 17.5 years.
To understand the implications of the ‘Rule of 70’, let’s consider a few examples. Suppose you have ₹1 lakh in your savings account, and you’re earning an interest rate of 6% per annum. If the inflation rate is 4%, the purchasing power of your ₹1 lakh would decrease over time. Using the ‘Rule of 70’, you can calculate that it would take approximately 17.5 years for the value of your money to halve. This means that in 17.5 years, your ₹1 lakh would be able to buy only half of what it can buy today.
The ‘Rule of 70’ has significant implications for investors and savers. It highlights the importance of considering inflation when making investment decisions. If you’re investing in a fixed deposit or a savings account, the interest rate you earn may not be sufficient to keep pace with inflation. As a result, the purchasing power of your money may decrease over time. On the other hand, if you invest in assets that offer higher returns, such as stocks or mutual funds, you may be able to stay ahead of inflation and maintain the purchasing power of your money.
In addition to the ‘Rule of 70’, there are several other rules in finance that can help you make informed decisions about your money. For instance, 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 it earns. Similarly, the ’20x life insurance’ rule suggests that you should have a life insurance cover that is at least 20 times your annual income.
In conclusion, the ‘Rule of 70’ is a valuable tool for understanding the impact of inflation on the value of money. By dividing 70 by the inflation rate, you can estimate the number of years it takes for the purchasing power of your money to halve. This rule has significant implications for investors and savers, highlighting the importance of considering inflation when making investment decisions. Whether you’re saving for a short-term goal or investing for the long term, it’s essential to understand the ‘Rule of 70’ and its implications for your financial security.
As you plan your financial future, it’s essential to keep in mind the various rules and formulas that can help you make informed decisions. By understanding the ‘Rule of 70’ and other financial rules, you can create a solid plan for your money and achieve your long-term goals.
To learn more about the ‘Rule of 70’ and other financial rules, you can visit the following news article: 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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