What is the ‘Rule of 70’ in finance?
As individuals, we often find ourselves wondering about the future value of our money. Will our savings be enough to sustain us in the long run, or will inflation erode its purchasing power? To answer these questions, financial experts use various rules of thumb, one of which is the “Rule of 70”. In this blog post, we will delve into the concept of the Rule of 70, its significance in finance, and how it can help us estimate the future buying power of our money.
The Rule of 70 is a simple yet effective way to estimate the number of years it will take for the value of money to halve due to inflation. The rule states that by dividing 70 by the inflation rate, we can determine how many years it will take for the rupee’s value 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 something that costs ₹100 today would cost approximately ₹200 in 17.5 years, resulting in the rupee losing half of its purchasing power.
To understand the Rule of 70 better, let’s consider another example. Suppose the inflation rate is 5%. Using the Rule of 70, we divide 70 by 5, which gives us 14 years. This implies that if something costs ₹100 today, it would cost around ₹200 in 14 years, assuming an inflation rate of 5%. As we can see, the Rule of 70 provides a quick and easy way to estimate the impact of inflation on our money over time.
The significance of the Rule of 70 lies in its ability to help us plan for the future. By understanding how inflation will affect the value of our money, we can make informed decisions about our investments, savings, and expenses. For instance, if we know that the value of our money will halve in 17.5 years due to inflation, we can adjust our investment strategy to ensure that our returns keep pace with inflation. This might involve investing in assets that historically perform well during periods of high inflation, such as gold or real estate.
In addition to helping us plan for the future, the Rule of 70 also highlights the importance of saving and investing. As we can see from the examples above, inflation can erode the value of our money over time, making it essential to save and invest wisely. By doing so, we can ensure that our money grows at a rate that keeps pace with inflation, thereby maintaining its purchasing power.
It’s worth noting that the Rule of 70 is not the only rule of thumb used in finance. Another popular rule is the “Rule of 72”, which estimates the number of years it will take for an investment to double in value based on the interest rate it earns. While the Rule of 72 is useful for estimating the growth of our investments, the Rule of 70 is more relevant when it comes to understanding the impact of inflation on our money.
In conclusion, the Rule of 70 is a valuable tool for estimating the future buying power of our money. By dividing 70 by the inflation rate, we can determine how many years it will take for the rupee’s value to lose half of its purchasing power. This rule of thumb can help us plan for the future, make informed investment decisions, and adjust our savings and expenses accordingly. As we strive to achieve financial security, it’s essential to understand the impact of inflation on our money and use tools like the Rule of 70 to make informed decisions.
To learn more about personal finance and money 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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