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 Bank of England's 2% target inflation, the value of cash sitting in a savings account is cut in half every 36 years. At recent higher rates, it's much 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: £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 £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 advisers recommend keeping 3-6 months of expenses in savings. We tested what happens to a £50,000 emergency fund over 20 years:

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 UK savings accounts pay 4-5% currently (higher than recent years), but this is unusual. Historically, easy-access accounts paid 0.5-1.5%. With inflation at 3%+, you're often losing purchasing power every year.

Real Returns on Savings (typical scenario):

• Savings account interest: 1.5%
• Inflation rate: 3%
• Real return: -1.5% per year

Even with today's higher rates, after tax (if you exceed your Personal Savings Allowance), the real return can still be negative.

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: £40,000
• Traditional 4% rule
• FIRE number: £1,000,000

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

• Annual expenses: £40,000 (today's pounds)
• Inflation-adjusted spending in year 30: £97,090
• Required FIRE number: £1,500,000+

Interpretation: Ignoring inflation could leave you £500,000 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 modelled different investment strategies using our Investment Returns Calculator to see which ones actually beat inflation:

£10,000 Over 20 Years

Interpretation: A Cash ISA 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

The ISA Advantage

One silver lining for UK investors: ISAs (Individual Savings Accounts) protect your gains from tax. This makes it even more important to use your £20,000 annual ISA allowance wisely:

• Cash ISA: Currently decent rates, but historically loses to inflation
• Stocks & Shares ISA: Better long-term inflation protection, tax-free growth
• Lifetime ISA: 25% government bonus plus tax-free growth (for house or retirement)

Action Steps Based on Our Analysis

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

1. Keep only 3-6 months expenses in cash - Accept the inflation loss for liquidity, but don't over-save in cash

2. Invest the rest in a Stocks & Shares ISA - Our analysis shows even conservative portfolios outperform cash in real terms

3. Adjust your FIRE target - Add 30-50% to your naive calculation to account for inflation over a long retirement

4. Review annually - Run these calculations yearly as inflation rates change

Calculate how inflation affects your savings:

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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
• 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. Put your money to work in assets that grow faster than prices rise.

Your future self will thank you.