Do You Want To Know How Inflation Impacts Your Savings? The ‘Rule Of 72’ May Help

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MINT HILL, NC – Have you ever heard of the ‘rule of 72’?  If not, here’s how it works: Divide 72 by the annual interest rate to determine the amount of time it takes for an investment to double.

The Consumer Price Index jumped to 8.6% in May.  That’s the fastest rate since December 1981, driven mainly by costs for gasoline, food and shelter. With inflation, the rule works in reverse: Consumers can approximate how quickly higher prices would halve the value of their savings. To do this, divide 72 by the annual inflation rate. Using this formula, consumers’ money would halve in value in roughly 8 to 8½ years. (Seventy-two divided by 8.6 equals 8.37.)

This rule assumes the current elevated inflation rate will persist for a long time, according to Greg McBride, chief financial analyst at Bankrate, and that’s unlikely. The Federal Reserve began raising its benchmark interest rate to increase borrowing costs, slow demand and eventually tame inflation.  Further, rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average. For example, someone who drives to work and pays for gasoline may experience higher prices more acutely than someone who uses public transit.  Inflation affects everyone differently, but one thing’s for sure…it hurts everyone.  How is inflation effecting you?

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This article was written by Greg Iacurci and released by CNBC.

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