The Rule of 72: How Inflation Silently Eats Your Savings
We ran the numbers on how inflation destroys purchasing power. See real calculations that show why your savings account might be your worst investment.
That $100 in your savings account feels safe. But every year, inflation is quietly stealing its purchasing power. We ran the numbers to show you exactly how much.
What is Inflation?
Inflation is the rate at which prices increase over time. When inflation is 3%, something that costs $100 today will cost $103 next year.
But the reverse is also true: your $100 will only buy $97 worth of goods.
The Rule of 72
The Rule of 72 is a simple way to estimate how long it takes for something to double (or halve) at a given rate.
Formula: 72 / rate = years to double
For Investments:
- At 7% annual returns, your money doubles in about 10 years (72 / 7 = 10.3)
- At 10% returns, it doubles in about 7 years
For Inflation:
- At 3% inflation, prices double in 24 years (72 / 3 = 24)
- At 6% inflation, prices double in just 12 years
! At historical average inflation of 3%, the value of cash sitting in a savings account is cut in half every 24 years.
We Tested It: Real Inflation Calculations
Using our Inflation Calculator, we analyzed how purchasing power has changed over different time periods. Here's what we found:
Test 1: $100 from 1990 to 2024
We entered $100 with a start year of 1990:
| Metric | Result |
|---|---|
| Original amount | $100.00 |
| Equivalent in 2024 | $243.12 |
| Total inflation | 143.12% |
| Your $100 now buys | $41.13 worth |
Interpretation: If you kept $100 in cash since 1990, it now has the purchasing power of just $41. Prices have more than doubled. Your "safe" savings lost 59% of its real value.
Test 2: $50,000 Emergency Fund Over 20 Years
Many financial advisors recommend keeping 6 months of expenses in savings. We tested what happens to a $50,000 emergency fund over 20 years:
| Time Period | Value at 3% Inflation | Purchasing Power Lost |
|---|---|---|
| Today | $50,000 | $0 |
| 10 years | $37,200 | $12,800 |
| 20 years | $27,700 | $22,300 |
| 30 years | $20,600 | $29,400 |
Interpretation: Your $50,000 "safety net" loses over $22,000 in purchasing power in just 20 years - without you touching it. After 30 years, it buys less than half of what it did originally.
Try these calculations yourself
The Savings Account Trap
Most savings accounts pay 0.5% to 1% interest. With inflation at 3%+, you're actually losing purchasing power every year.
Real Returns on Savings:
- Savings account interest: 0.5%
- Inflation rate: 3%
- Real return: -2.5% per year
Your "safe" savings is actually shrinking in real terms.
How to Beat Inflation: We Ran the FIRE Numbers
For those pursuing Financial Independence, inflation dramatically affects your target number. We used our FIRE Calculator to model two scenarios:
Scenario A: Ignoring Inflation
- Annual expenses: $50,000
- Traditional 4% rule
- FIRE number: $1,250,000
Scenario B: Accounting for 3% Inflation Over 30-Year Retirement
- Annual expenses: $50,000 (today's dollars)
- Inflation-adjusted spending in year 30: $121,363
- Required FIRE number: $1,850,000+
Interpretation: Ignoring inflation could leave you $600,000 short of what you actually need. The 4% rule assumes your investments keep pace with inflation, but your target number needs to account for rising expenses.
Calculate your own FIRE number
Investment Returns vs Inflation
We modeled different investment strategies using our Investment Returns Calculator to see which ones actually beat inflation:
$10,000 Over 20 Years
| Strategy | Nominal Return | After 3% Inflation | Real Gain/Loss |
|---|---|---|---|
| Savings Account (0.5%) | $11,049 | $6,117 | -$3,883 |
| Bonds (4%) | $21,911 | $12,131 | +$2,131 |
| Stock Index (7%) | $38,697 | $21,425 | +$11,425 |
| Aggressive Growth (10%) | $67,275 | $37,253 | +$27,253 |
Interpretation: A savings account doesn't just fail to grow - it actively loses money in real terms. You need at least 3-4% returns just to break even. Stock market investments historically provide the best inflation protection.
Model your own investment scenarios
Action Steps Based on Our Analysis
Based on our calculations, here's what the numbers suggest:
-
Keep only 3-6 months expenses in savings - Accept the inflation loss for liquidity, but don't over-save in cash
-
Invest the rest - Our analysis shows even conservative bond funds outperform savings accounts in real terms
-
Adjust your FIRE target - Add 30-50% to your naive calculation to account for inflation over a long retirement
-
Review annually - Run these calculations yearly as inflation rates change
The Bottom Line
Inflation isn't dramatic or visible day-to-day, but our calculations show it can devastate your purchasing power. The Rule of 72 tells us prices double every 24 years at 3% inflation.
Using our calculators, we demonstrated that:
- $100 from 1990 now buys only $41 worth of goods
- A $50,000 emergency fund loses $22,300+ over 20 years
- Savings accounts actually lose 2.5% per year in real terms
- You need 3-4% returns just to break even
Don't let inflation silently eat your wealth. Put your money to work in assets that grow faster than prices rise.
Your future self will thank you.