The Rule of 72: How Inflation Silently Eats Your Savings

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 the RBA's 2-3% target inflation, the value of cash sitting in a savings account is cut in half every 24-36 years. During 2022's peak inflation of 7.8%, it would have halved in just 9 years.

We Tested It: Real Inflation Calculations

Using our Inflation Calculator, we analysed 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:

Interpretation: If you kept $100 in cash since 1990, it now has the purchasing power of just $44. Prices have more than doubled. Your "safe" savings lost 56% of its real value.

Test 2: $80,000 Emergency Fund Over 20 Years

Many financial advisers recommend keeping 3-6 months of expenses in savings. We tested what happens to an $80,000 emergency fund over 20 years:

Interpretation: Your $80,000 "safety net" loses over $35,000 in purchasing power in just 20 years - without you touching it.

Try these calculations yourself

The Savings Account Trap

Australian savings accounts currently pay 4-5% at best (often with conditions), but this is unusual. Historically, they paid 1-2%. With inflation at 3%+, you're often losing purchasing power every year.

Real Returns on Savings (typical scenario):

• Savings account interest: 2%
• Inflation rate: 3.5%
• Real return: -1.5% per year

Even with today's higher rates, tax takes a chunk (depending on your marginal rate), often leaving you below inflation.

The Australian Advantage: Superannuation

Australia's superannuation system is one of the world's best inflation-fighting tools:

Superannuation Benefits

• Concessional tax rate: Only 15% on contributions and earnings
• Compulsory savings: 11.5% of salary (rising to 12%)
• Long time horizon: Decades of compounding growth
• Tax-free in retirement: After age 60

Our Analysis: $100,000 in super at 7% for 30 years:

• Final value: $761,226
• Tax saved vs outside super: ~$150,000+
• Inflation-adjusted value: ~$313,000

This beats any savings account by a massive margin.

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: $70,000
• Traditional 4% rule
• FIRE number: $1,750,000

Scenario B: Accounting for 3% Inflation Over 30-Year Retirement

• Annual expenses: $70,000 (today's dollars)
• Inflation-adjusted spending in year 30: $169,908
• Required FIRE number: $2,625,000+

Interpretation: Ignoring inflation could leave you $875,000 short of what you actually need.

Calculate your own FIRE number

Investment Returns vs Inflation

We modelled different investment strategies using our Investment Returns Calculator:

$10,000 Over 20 Years

Interpretation: A savings account actively loses money in real terms. Super options dramatically outperform cash.

Model your own investment scenarios

Australian-Specific Inflation Factors

Australia faces unique inflation pressures:

• Housing costs: Property in Sydney and Melbourne has outpaced general inflation by 2-3x
• Energy prices: Electricity costs have risen faster than general inflation
• Import dependency: Weak Aussie dollar increases costs of imported goods
• Geographic isolation: Shipping and logistics add to consumer goods costs

Action Steps Based on Our Analysis

Based on our calculations, here's what the numbers suggest for Australians:

1. Maximise super contributions - Salary sacrifice up to the $27,500 concessional cap

2. Keep only 3-6 months expenses in savings - Accept the inflation loss for liquidity

3. Consider ETFs for non-super investments - Tax-efficient way to beat inflation

4. Review your super investment option - Many Australians are in "Balanced" when "Growth" suits their timeline

5. Adjust your FIRE target - Add 30-50% to your naive calculation

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 $44 worth of goods
• An $80,000 emergency fund loses $35,680+ over 20 years
• Cash savings often lose 1-2% per year in real terms
• You need 3-4% returns just to break even

Don't let inflation silently eat your wealth. Use Australia's super system and invest outside super in growth assets that outpace rising prices.

Your future self will thank you.