The sharp rise in inflation which hit a 30 year high of over 9% last month for many is disturbing. Inflation could exceed 10% later this year.
I am not sure whether you have come across the Rule of 72? It is an excellent tool to calculate approximately when money may halve in value or double in value. Depending on the level of interest rates being assumed a formula of 70 or 69.3 would be more accurate; but you will find as 72 is easily divisible by inflation numbers or interest rates you may select, the result will be close enough to give us an indication when our investments may double in value or when inflation may halve in value.
This formula has been around for hundreds of years certainly before the 15th century.
Imagine as we have seen recently inflation exceeds 9%. If we divide 9 into 72 the answer is 8. That means your money will halve in value in just eight years. Imagine again money on deposit at nominal rates of interest that rate of declining your capital can be shocking. Inflation only at the beginning of this year was say around 3%. Divide 3 into 72 and it shows that in 24 years your money will halving in value.
We hope that the latest sharp rise in inflation is not prolonged.
In the same way when you are investing money if you earn a return of say 6% per annum then divide 6 into 72 and you will see that you money could double in value in just 12 years.
Why am I referring to the Rule of 72. It just reminds us that when we are investing our money we want to ensure that it keeps pace at least with inflation. Money on deposit is eroded by inflation. When we are borrowing money for example through Equity Release it gives us a good indication when our loan will double in value if interest is rolled up.
Trevor Downing FPMI FPFS
