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? How will inflation affect the purchasing power of our hard-earned cash? To answer these questions, financial experts often refer to the “Rule of 70”, a simple yet powerful tool used to estimate the future buying power of money.
The Rule of 70 is a straightforward formula that helps us understand how inflation can erode the value of our money over time. By dividing 70 by the inflation rate, we can determine how many years it will take for the value of our money to halve. This means that if we know the current inflation rate, we can estimate how long it will take for our money to lose half of its purchasing power.
For example, let’s assume an inflation rate of 4%. Using the Rule of 70, we can calculate the number of years it will take for the value of our money to halve as follows: 70 / 4 = 17.5 years. This means that if something costs ₹100 today, it will cost approximately ₹200 in 17.5 years, assuming an inflation rate of 4% per annum. In other words, the rupee will lose half of its purchasing power in 17.5 years.
The implications of the Rule of 70 are significant. It highlights the importance of considering inflation when making long-term financial decisions. If we fail to account for inflation, our savings may not be worth as much in the future as they are today. This is why it’s essential to factor in inflation when planning for retirement, saving for a big purchase, or investing in assets that will generate returns over time.
The Rule of 70 is often compared to the Rule of 72, another popular financial formula used to estimate the number of years it takes for an investment to double in value, based on the interest rate it earns. While the Rule of 72 is useful for understanding the power of compound interest, the Rule of 70 provides a complementary perspective on the impact of inflation on our money.
To illustrate the significance of the Rule of 70, let’s consider a few more examples. If the inflation rate is 5%, it will take approximately 14 years (70 / 5 = 14) for the value of our money to halve. On the other hand, if the inflation rate is 3%, it will take around 23.3 years (70 / 3 = 23.3) for our money to lose half of its purchasing power.
The Rule of 70 has important implications for investors, savers, and anyone who wants to maintain the purchasing power of their money over time. It emphasizes the need to invest in assets that will generate returns that keep pace with or exceed the inflation rate. This could include investments in stocks, real estate, or other assets that have historically provided returns that beat inflation.
In addition to investing, the Rule of 70 also highlights the importance of saving regularly and consistently. By setting aside a portion of our income each month, we can build a safety net that will protect us from the erosive effects of inflation. This is especially important for individuals who are saving for long-term goals, such as retirement or a down payment on a house.
In conclusion, the Rule of 70 is a simple yet powerful tool that helps us understand the impact of inflation on the future buying power of our money. By dividing 70 by the inflation rate, we can estimate how many years it will take for our money to lose half of its purchasing power. This knowledge can help us make informed financial decisions, such as investing in assets that will generate returns that keep pace with inflation and saving regularly to build a safety net. As we navigate the complex world of personal finance, the Rule of 70 is an essential concept to keep in mind.
About the Author
