What is the ‘Rule of 70’ in finance?
As individuals, we often find ourselves grappling with the complexities of personal finance, trying to make sense of the various rules and principles that govern the world of money. One such concept that has gained significant attention in recent times is the ‘Rule of 70’. But what exactly does this rule entail, and how can it help us better understand the future buying power of our hard-earned money?
The ‘Rule of 70’ is a simple yet powerful tool used to estimate the number of years it will take for the value of money to halve due to inflation. In other words, it helps us calculate how long it will take for the purchasing power of our money to decrease by half. To apply this rule, all you need to do is divide 70 by the prevailing inflation rate. The result will give you the number of years it will take for the value of money to decline by 50%.
For instance, let’s assume the current inflation rate is 4%. By dividing 70 by 4, we get 17.5 years. This means that if something costs ₹100 today, it will cost approximately ₹200 in 17.5 years, given the 4% inflation rate. In other words, the rupee will lose half of its purchasing power in about 17.5 years.
The ‘Rule of 70’ is a useful concept for individuals looking to plan their finances and make informed investment decisions. By understanding how inflation can erode the value of money over time, we can take steps to mitigate its impact and ensure that our savings and investments keep pace with the rising cost of living.
To illustrate the significance of the ‘Rule of 70’, let’s consider a few more examples. Suppose the inflation rate is 5%. In this case, dividing 70 by 5 gives us 14 years. This means that if something costs ₹100 today, it will cost around ₹200 in 14 years, assuming a 5% inflation rate. On the other hand, if the inflation rate is 3%, dividing 70 by 3 gives us 23.33 years. This implies that the value of money will take longer to halve, with something that costs ₹100 today costing approximately ₹200 in 23.33 years.
The ‘Rule of 70’ has important implications for our financial planning. It highlights the need to invest our money wisely, taking into account the impact of inflation on our purchasing power. By investing in assets that generate returns higher than the inflation rate, we can ensure that our savings and investments grow in value over time, helping us maintain our standard of living.
In addition to the ‘Rule of 70’, there are several other money rules that can help us achieve financial security. For example, the ‘Rule of 72’ is a related concept that estimates the number of years it will take for an investment to double in value, based on the interest rate it earns. By understanding these rules and principles, we can make more informed decisions about our money and create a brighter financial future for ourselves.
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 how many years it will take for the value of money to halve. This concept has significant implications for our financial planning, highlighting the need to invest our money wisely and take into account the impact of inflation on our purchasing power. As we navigate the complexities of personal finance, it’s essential to stay informed about these money rules and principles, including the ‘Rule of 70’, to achieve financial security and stability.
About the Author
