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Understanding inflation with the Rule of 72

The magical number 72 in the financial world can help you to get a better understanding of the value of your money in the future.

72 can very easily be used to establish values in the future with extraordinary accuracy.

Inflation is a measurement of the value of your money over time. The higher the consumer price index (CPI) the less your rand will be worth. That is the main reason why the Reserve Bank is mandated to keep the rate below 6%.

Let’s get an idea of how damaging a high inflation rate can be by using the rule of 72. If inflation is 6% then simply divide 6 into 72, and the answer 12 is the number of years your money will take to halve in value.

So inflation at 6% will halve the value of the rand in 12 years.

If inflation was allowed to reach 12% then 12 divided into 72 results in 6 years. So it will take 6 years for your money to halve in value.

The rule of 72 will help to understand why it is so important to keep inflation under control, and as low as possible. A little inflation is a good thing for an economy. However, if it is rampant then it will destroy an economy in no time. This is what happened in Zimbabwe a few years ago, when it reached a zillion percent.

This equated to money halving in value every hour. At the time it made financial sense to pay for a coffee at the local restaurant before having, it as it would cost double by the time you finished it.

Just by dividing the expected rate into 72 you get a very accurate picture of how your money is affected.

Listen to the audio below for more information...

Read more from Paul Roelofse at www.investforlife.co.za

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