The “Rule of 72” is a gauge investors use to determine how quickly their money will double in value and, applied in reverse, this method can show you the length of time your money will lose half its value.
Admittedly, it can be pretty fun using the longtime yardstick called the “Rule of 72” to figure out how much time it will take for your investments to double in value. But you can also reverse this method to determine how long it will take inflation to replenish the value of your money by half. Below, we’ll look at how to calculate both gains and losses.
The rule of 72 works like this:
Take the number 72 and divide it by the return you expect with the investment. The quotient will give you the number of years it will take you to double your money.
For example, let’s say there’s a high-risk investment you expect to bring you 10% ROI (return on investment) annually.
72 divided by 10% = 7.2 years.
Another way of applying this is dividing 72 by the annual interest rate you earn, and that will determine the amount of time it takes for an investment to double.
For example, if your investment yields 2% annually. It will take 36 years to double your money.
The rule of 72 reversed works like this:
As of the end of April 2022, the inflation rate was 8.3 percent.
To calculate how long it will take for your money to use half its value, divide the number 72 by 8.3.
The result equals 8.67, which means your dollar today will be worth fifty cents in roughly 9 years.
Keep in mind, applying the rule in this manner assumes that the inflation rate will stay elevated and constant, at least for a while.
If the amount of inflation increases, your money will be worth less sooner. If inflation decreases, the value of your money will still likely decrease (there’s always some inflation), but it likely won’t diminish as quickly.
All healthy economies experience some inflation. The Federal Reserve aims for a long-term rate of around 2%, according to CNBC. A 2% rate of inflation means that it will take about 36 years for money to halve its value, according to the rule of 72.