Inflation and the Rule of 72
How do you figure out how long it will take for the Rand to halve in value at a particular inflation rate? Use the Rule of 72!
This remarkable “Rule” is very accurate, but is not mathematically exact.
Let’s say that you expect inflation to average 7%. You have R1m under the mattress. How long before it is only worth R500K in buying power?
You divide the number 72 by the inflation rate 72/7 = 10 years. Isn’t that clever?
Say you expect inflation to average 9%, then your R1m will be worth only R500K in 72/9 = 8 years and after another 8 years it will only be worth R250K.
You have a property that is worth R2m now. When will it be “worth” R4m at 8% inflation? 72/8 = 9 years. Then you sell it and have to pay CGT on your “capital gain” of R2m or hang onto it for another 9 years and pay CGT on R6m!
The rule was discovered by none other than Albert Einstein.
Here’s how close it is to the exact mathematical result –