Use ‘Rule of 72’ to know how inflation impacts your saving 

The Fellowship of Penny Calling Penny
August 16, 2022
Rule of 72
Rule of 72

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The possibility of persistent inflation seems to be looming large with a recent string of troubling inflation reports.

On Friday, U.S. consumer inflation reached its highest level in more than four decades in May as increasing energy and food costs pushed prices higher.

The consumer price index, which gauges how quickly costs are rising for a basket of goods and services, increased 8.6% in May from the same month a year ago, marking its fastest pace since December 1981.

Experts say that prevailing high inflation is expected to continue for some time. As a consumer, you can apply the “Rule of 72” to assess how rising prices are impacting your buying power. This rule of thumb is simple to calculate the long-term effect.

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The Rule of 72 is an accurate formula that tells when will your money double. It is easy to decide in how many years the investment will double through this formula. Keep in mind that a formula is an estimation tool and the years are approximate. You can use this formula by dividing the annual interest rate by 72 to determine the amount of time it takes for an investment to double.

For example, if you are earning 4% a year through investment, divide 72 by 4 to get the number of years it takes your money to double. In this case, it will take 18 years for your money to get double.

When it comes it inflation, the rule works in reverse. According to Rule of 72, your currency will lose half of its purchasing power in about 8.37 years 

For example, if you have $100,000 with an inflation rate of 8%. Since inflation reduces your purchasing power over time, your $100,000, if not invested, would lose half its value in 9 years.

However, you have to keep a few cautions in mind while using the rule of 72 like if the feds are changing the interest rates in the coming days or not. This rule also assumes that the current rate of inflation will exist for a long period. The inflation rate also varies from various low-income families to high-income families.    

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