Savings made simple - Inflation and the Rule of 72
Inflation and the Rule of 72
Overview
using the Rule to see how your investment will grow
the dramatic effect of inflation
The Rule of 72 is a rough guide to help you find out how many years it will take to double the value of your investment.
Let’s say, just to make the maths simple, we assume an initial investment of £10,000 and a growth rate of 7% a year.
Take 72 and divide it by 7 to get 10.28: so your investment will double in just over 10 years, and then double again every subsequent 10 years.
So if you kept it invested for over 30 years (3 x 10 years), the sort of time span that most pensions run for, your investment would be worth £80,000: an eight-fold return. The longer you stay invested, the better.
But what about inflation? Well, you can calculate the length of time it will take for inflation to halve the real value of your money.
Assume an average inflation rate of 3%. Divide 72 by 3, and you’ll quickly see that your money’s purchasing power would halve in 24 years. So our hypothetical pension pot of £80,000 would be worth less than £40,000 in today's terms.
