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, the Rule of 70 is a way to calculate how long it will take for the value of money to halve due to inflation. 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.
To understand the Rule of 70, let’s break it down. The rule states that dividing 70 by the inflation rate will give you the number of years it will take for the value of money to halve. For example, if the inflation rate is 4%, dividing 70 by 4 gives you 17.5 years. This means that if something costs ₹100 today, it will cost around ₹200 in 17.5 years, assuming an inflation rate of 4%. In other words, the rupee will lose half of its purchasing power in 17.5 years.
The Rule of 70 is a simple yet effective way to understand the impact of inflation on the value of money. Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. It erodes the purchasing power of money, meaning that the same amount of money can buy fewer goods and services over time. The Rule of 70 helps individuals to estimate the effects of inflation on their money and make informed decisions about investments and savings.
To illustrate the Rule of 70, let’s consider a few examples. Suppose the inflation rate is 5%. Dividing 70 by 5 gives you 14 years. This means that if something costs ₹100 today, it will cost around ₹200 in 14 years, assuming an inflation rate of 5%. Similarly, if the inflation rate is 3%, dividing 70 by 3 gives you 23.33 years. This means that if something costs ₹100 today, it will cost around ₹200 in 23.33 years, assuming an inflation rate of 3%.
The Rule of 70 has significant implications for individuals, especially when it comes to saving and investing. It highlights the importance of considering inflation when making financial decisions. For instance, if you are saving for a long-term goal, such as retirement or a down payment on a house, you need to factor in the effects of inflation. You may need to save more than you think to achieve your goal, as the value of money will decrease over time due to inflation.
In addition to the Rule of 70, there are other financial rules that individuals should be aware of. For example, the Rule of 72 is a formula that estimates how long it will take for an investment to double in value, based on the interest rate it earns. Another rule is the 20x life insurance rule, which suggests that individuals should have life insurance coverage that is 20 times their annual income.
In conclusion, the Rule of 70 is a valuable tool for estimating the future buying power of money. It helps individuals to understand the impact of inflation on the value of money and make informed decisions about saving and investing. By considering the effects of inflation, individuals can create a more effective financial plan and achieve their long-term goals.
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
About the Author
