Inflation - The Silent Thief

A penny saved is a penny earned! But thanks to inflation, not really. 

Over time, the value of the penny saved could be much less than when it was earned. For instance, Rs. 100 will be worth Rs. 90 after a year if it is not invested and the inflation rate is 10%. To illustrate this, let’s say you can buy a pizza for Rs. 200 this year and annual inflation is 10%. Theoretically, 10% inflation means that next year the same pizza will cost 10% more, or Rs. 220. So, if your money doesn't increase in value by at least the same rate of inflation, you will not be able to buy as many pizzas in future. Imagine that!

Inflation is a silent thief – you will not necessarily notice how much it erodes your savings over time, because their physical ‘value’ does not change, but what you can buy with those savings is being cut, unless you do something about it. You may have the same amount of money, but the purchasing power of that money has diminished now. That is why one always has to be on the lookout for investments whose returns are more than the prevailing inflation rate. The effects of inflation often go unnoticed due to one’s focus on nominal earnings rather than real earnings. If inflation is rising at 9% and one earns 6% in a bank fixed-deposit, even though the return is guaranteed and one may feel 6% richer, the reality is that one is 3% poorer. This is why it is vital to take advice on the best way to grow your portfolio, whether you have the money in cash or investments, as this will keep you closer to maintaining, and hopefully exceeding your previous purchasing power as time goes on.

To not let inflation get the better of you, you will need to deploy a two-pronged strategy – make the most return you can on your savings and investments, and cut as much as you can on your spending. If prices are rising for, let’s say coffee, then it is vital to look for ways to cut your costs - such as buying a different, cheaper item if you can, or choosing an alternative to the product you usually buy. While this may sound obvious, and something you would look to do anyway, this is one of the most effective things you can do to help reduce your own personal rate of inflation. It sounds like simple budgeting, doesn’t it? Well there is a good reason for that - it is!

Want to know how much your monthly expense will be when you retire at age 60, when your current monthly expense is Rs. 1,00,000 at the age of 40? And how much you would need to invest now in order to be able to fund that expense after retirement? Head over to our Calculator tool and click on Retirement Calculator!