What is the ‘Rule of 70’ in finance?
As individuals, we often struggle to make sense of the complex world of finance, where numbers and jargon can be overwhelming. However, there are certain rules of thumb that can help us navigate this world and make informed decisions about our 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, explore its significance, and provide examples to illustrate its application.
The Rule of 70 is a simple yet powerful tool that helps us understand the impact of inflation on the value of money over time. In essence, it states that dividing 70 by the inflation rate shows how many years it will take for the value of money to halve. This means that if the inflation rate is 4%, for instance, it will take approximately 17.5 years for the value of ₹100 to be reduced to ₹50 in terms of purchasing power. To put it another way, something that costs ₹100 today would cost about ₹200 in 17.5 years, assuming an inflation rate of 4%. This is a sobering thought, as it highlights the erosion of the value of money over time due to inflation.
To illustrate this concept further, let’s consider a few examples. Suppose you have ₹10,000 in a savings account that earns an interest rate of 2% per annum. If the inflation rate is 4%, the purchasing power of your ₹10,000 will decrease over time. Using the Rule of 70, we can calculate that it will take approximately 17.5 years for the value of your ₹10,000 to halve to ₹5,000 in terms of purchasing power. This means that even if your savings account earns a 2% interest rate, the inflation rate of 4% will still erode the value of your money over time.
The Rule of 70 has significant implications for our financial planning and decision-making. For one, it highlights the importance of investing our money wisely to keep pace with inflation. If we simply keep our money in a savings account or under the mattress, its value will decrease over time due to inflation. On the other hand, if we invest our money in assets that earn a return higher than the inflation rate, we can preserve its purchasing power and even grow our wealth over time.
Another implication of the Rule of 70 is that it emphasizes the need for long-term thinking when it comes to our finances. Rather than focusing on short-term gains or quick fixes, we should adopt a long-term perspective and make decisions that will help us achieve our financial goals over the next 10, 20, or 30 years. This might involve investing in a diversified portfolio of stocks, bonds, and other assets, or taking steps to reduce our expenses and increase our income.
In addition to the Rule of 70, there are several other money rules that can help us achieve financial security. For instance, the “Rule of 72” is a related concept that estimates how long it will take for an investment to double in value based on the interest rate it earns. There is also the “20x life insurance” rule, which suggests that we should have life insurance coverage equal to 20 times our annual income to ensure that our loved ones are protected in the event of our passing.
In conclusion, the Rule of 70 is a valuable tool that can help us understand the impact of inflation on the value of money over time. By dividing 70 by the inflation rate, we can estimate how many years it will take for the value of money to halve, and make informed decisions about our financial planning and investment strategies. Whether we are saving for retirement, paying off debt, or building wealth, the Rule of 70 is an essential concept to keep in mind. As we navigate the complex world of finance, it is essential to stay informed and up-to-date on the latest developments and trends. For more information on personal finance and money rules, please 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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