What is the ‘Rule of 70’ in finance?
As individuals, we often struggle to understand the complexities of finance and the impact of inflation on our hard-earned money. Inflation, which is a sustained increase in the general price level of goods and services in an economy over a period of time, can erode the purchasing power of our money. To estimate the future buying power of money, financial experts use the ‘Rule of 70’. In this blog post, we will delve into the ‘Rule of 70’, its significance, and how it can help us make informed financial decisions.
The ‘Rule of 70’ is a simple yet powerful tool used to estimate the number of years it takes for the value of money to halve due to inflation. The rule states that if you divide 70 by the inflation rate, you will get the number of years it will take for the value of money to lose half of its purchasing power. For instance, 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 approximately ₹200 in 17.5 years, resulting in the rupee losing half of its purchasing power.
To illustrate this further, let’s consider an example. Suppose you have ₹100 today, and you want to know how long it will take for its value to halve at an inflation rate of 5%. Using the ‘Rule of 70’, you would divide 70 by 5, which gives you 14 years. This means that at an inflation rate of 5%, the value of your ₹100 will be reduced to ₹50 in 14 years.
The ‘Rule of 70’ is a useful tool for individuals to understand the impact of inflation on their savings and investments. It helps us to plan for the future and make informed decisions about our financial resources. By using this rule, we can estimate the future value of our money and take steps to mitigate the effects of inflation. For instance, if we know that the value of our money will halve in 15 years, we can invest in assets that are likely to appreciate in value over time, such as stocks, real estate, or gold.
In addition to the ‘Rule of 70’, there are other financial rules that can help us achieve financial security. The ‘Rule of 72’, for example, is used to estimate the number of years it takes for an investment to double in value based on the interest rate it earns. By dividing 72 by the interest rate, we can determine the number of years it will take for our investment to double. For instance, if the interest rate is 6%, dividing 72 by 6 gives us 12 years. This means that at an interest rate of 6%, our investment will double in value in 12 years.
Another important financial rule is the ’20x life insurance rule’, which states that we should have life insurance coverage equal to 20 times our annual income. This rule helps us to ensure that our dependents are financially secure in the event of our untimely death. By having adequate life insurance coverage, we can provide for our loved ones and give them the financial security they need to maintain their standard of living.
In conclusion, the ‘Rule of 70’ is a valuable tool for estimating the future buying power of money. By dividing 70 by the inflation rate, we can determine the number of years it will take for the value of money to halve. This rule, combined with other financial rules such as the ‘Rule of 72′ and the ’20x life insurance rule’, can help us make informed decisions about our financial resources and achieve financial security. As individuals, it is essential that we understand these rules and use them to plan for our financial future.
To learn more about the ‘Rule of 70’ and other financial rules, you can visit the following news source:
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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