#Financial-Planning  #Investment  #Saving  #Finance 

📝 Topics Covered

  • Understanding Inflation & Purchasing Power
  • How to Beat Inflation
  • The Different Types of Interest (Simple, Compound, CAGR)
  • Legendary Rules of Compounding (Rule of 72, 114, 144, 70)

2.1 📉 Inflation

What is Inflation?

  • Inflation is the mathematical decline in the purchasing power of a given currency over time.
  • It literally means the purchasing power of the exact same amount of money 💰 steadily decreases year over year.

How does the printing of money affect Inflation?

  • When a central bank prints excess money, it injects high liquidity into the market, directly increasing the spending power of individuals.
  • This leads to a much higher demand for goods, but the physical supply of those goods usually remains the same.
  • High Demand + Fixed Supply = Price of goods aggressively increases.

How to Defeat Inflation

The Golden Rule: Rate of Return (RR) > Inflation Rate (IR)

  • If your RR < IR, your money is literally eating itself and you are secretly getting poorer every day, even if your nominal bank balance is going up.

Inflation’s Hidden Effect on Investments

The true math behind your investments is the “Real Return”.

  • Actual (Real) Return = Investment Return - Inflation

Example of a Losing Investment:

  • Return from Bank FD = 10%
  • Current Inflation Rate = 12%
  • Real Loss: 10% - 12% = -2%
  • Conclusion: Despite making a 10% “profit” on paper, because of hyperinflation, the actual purchasing power of your principal is degrading.

2.2 📈 The Types of Interest

Before investing, universally understand how your numbers grow:

  • Simple Interest: Interest is only calculated on the principal amount. Growth is linear.
  • Compound Interest: Interest is calculated on the principal AND the initially accumulated interest. Growth is exponential.
  • CAGR (Compound Annual Growth Rate):
  • XIRR / IRR (Extended Internal Rate of Return):
    • Used to calculate exact returns when you have multiple SIPs/transactions happening at different, irregular times.
    • XIRR Google Sheet Calculator .

🧮 The Legendary Rules of Compounding

These mathematical shortcuts help you instantly calculate how time and interest rates affect your money without using a calculator. (Note: Replace ‘Rate’ in the formulas with your expected annual percentage).

1️⃣ Rule of 72 (Doubling your Money)

It tells you the exact number of years required to naturally Double (2X) your principal.

Formula: Years = 72 ÷ Rate

  • Example @ 12% Return: 72 / 12 = 6 Years
  • Example @ 10% Return: 72 / 10 = 7.2 Years

2️⃣ Rule of 114 (Tripling your Money)

It tells you the exact number of years required to mechanically Triple (3X) your principal.

Formula: Years = 114 ÷ Rate

  • Example @ 12% Return: 114 / 12 = 9.5 Years
  • Example @ 10% Return: 114 / 10 = 11.4 Years (Note: Corrected from original 14 yrs)

3️⃣ Rule of 144 (Quadrupling your Money)

It tells you the exact number of years required to massively Quadruple (4X) your principal.

Formula: Years = 144 ÷ Rate

  • Example @ 12% Return: 144 / 12 = 12 Years
  • Example @ 10% Return: 144 / 10 = 14.4 Years

⚠️ Rule of 70 (The Inflation Half-Life)

Unlike the others, this rule calculates destruction. It tells you the exact number of years required for persistent inflation to reduce the value of your money to HALF (-50%).

Formula: Years = 70 ÷ Inflation Rate

  • Example @ 7% Inflation: 70 / 7 = 10 Years
  • Conclusion: If inflation averages 7%, the purchasing power of your ₹1 Lakh today will functionally feel like ₹50,000 in exactly 10 years.

🧘‍♂️ Gyan

  • Avoid relying endlessly on long-term FDs: Most probably, your conservative Bank FD will barely match or explicitly fail to consistently beat the long-term inflation rate.

Reference