The Rule of 72: How Inflation Silently Eats Your Savings

That ₹1 lakh 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 6%, something that costs ₹100 today will cost ₹106 next year.

But the reverse is also true: your ₹100 will only buy ₹94 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 12% annual returns, your money doubles in about 6 years (72 / 12 = 6)
• At 15% returns, it doubles in about 5 years

For Inflation:

• At 6% inflation, prices double in 12 years (72 / 6 = 12)
• At 8% inflation, prices double in just 9 years

! At India's average inflation of 5-6%, the value of cash sitting in a savings account is cut in half every 12-14 years. During high inflation years (7-8%), it halves even faster.

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: ₹1 Lakh from 2000 to 2024

We entered ₹1,00,000 with a start year of 2000:

Interpretation: If you kept ₹1 lakh in cash since 2000, it now has the purchasing power of just ₹24,000. Prices have quadrupled. Your "safe" savings lost 76% of its real value.

Test 2: ₹10 Lakh Emergency Fund Over 20 Years

Many financial advisers recommend keeping 6 months of expenses in savings. We tested what happens to a ₹10 lakh emergency fund over 20 years:

Interpretation: Your ₹10 lakh "safety net" loses nearly ₹7 lakh in purchasing power in just 20 years - without you touching it.

Try these calculations yourself

The Savings Account & FD Trap

Indian savings accounts pay just 2.5-4% interest. Fixed Deposits (FDs) pay 6-7%. With inflation at 5-6%, you're often barely breaking even or losing purchasing power.

Real Returns on Savings (typical scenario):

• Savings account interest: 3%
• Inflation rate: 6%
• Real return: -3% per year

Real Returns on FD:

• FD interest: 7%
• Tax at 30% slab: -2.1%
• Net after tax: 4.9%
• Inflation: 6%
• Real return: -1.1% per year

Even FDs lose money in real terms for many taxpayers!

Better Options: PPF, ELSS, and NPS

India offers several tax-advantaged options that beat inflation:

Public Provident Fund (PPF)

• Interest rate: ~7.1% (tax-free)
• EEE status: No tax at any stage
• Lock-in: 15 years
• Real return at 6% inflation: +1.1%

Equity Linked Savings Scheme (ELSS)

• Historical returns: 12-15%
• Tax benefit under 80C
• Lock-in: Only 3 years
• Real return at 6% inflation: +6-9%

National Pension System (NPS)

• Historical returns: 9-12%
• Additional ₹50,000 deduction under 80CCD(1B)
• Real return at 6% inflation: +3-6%

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: ₹12,00,000
• Traditional 4% rule
• FIRE number: ₹3,00,00,000 (3 crore)

Scenario B: Accounting for 6% Inflation Over 30-Year Retirement

• Annual expenses: ₹12,00,000 (today's rupees)
• Inflation-adjusted spending in year 30: ₹68,92,128
• Required FIRE number: ₹6,00,00,000+ (6 crore)

Interpretation: Ignoring inflation could leave you ₹3 crore 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:

₹1 Lakh Over 20 Years

Interpretation: A savings account loses nearly half its value in real terms! Even FDs barely beat inflation. Equity investments are the only reliable inflation hedge.

Model your own investment scenarios

Indian-Specific Inflation Factors

India faces unique inflation pressures:

• Food inflation: Can be volatile (10%+ in some years)
• Fuel prices: Global oil prices impact heavily
• Education costs: Rising 8-12% annually
• Healthcare costs: Increasing faster than general inflation
• Real estate in metros: Mumbai, Delhi prices have outpaced general inflation significantly

Action Steps Based on Our Analysis

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

1. Max out your 80C limit - PPF + ELSS give tax savings AND inflation-beating returns

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

3. Start SIPs in index funds or ELSS - Even ₹5,000/month compounds significantly

4. Consider NPS for the extra ₹50,000 deduction - Additional tax savings with good returns

5. Adjust your FIRE target significantly - Add 50-100% to your calculation for Indian inflation

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 12 years at 6% inflation.

Using our calculators, we demonstrated that:

• ₹1 lakh from 2000 now buys only ₹24,000 worth of goods
• A ₹10 lakh emergency fund loses ₹6.88 lakh+ over 20 years
• Savings accounts lose 3% per year in real terms
• Even FDs often lose money after tax and inflation
• You need 6%+ returns just to break even in India

Don't let inflation silently eat your wealth. Move beyond FDs and invest in equity through SIPs, ELSS, and index funds.

Your future self will thank you.