What is inflation and How to beat it?
What is inflation
When your purchasing power of money goes down over the years, its due to inflation.
How much will your money be able to buy 5 or 10 years from today, is the effect of inflation.
If this is what you are trying to understand, then this blog is for you.
Lets understand what is inflation and how to beat it:
- What's the difference between saving and investing: Inflation cannot be stopped but you can plan to insulate your financial goals from inflation. Therefore understanding the effects of inflation and then investing your saving brings you on a better platform than being naive!
- Our parents or grandparents never had any trouble saving money as they didn't have this factor called as "inflation" and they were not aware of its effects. This created the difference between saving and investing. If you understand the difference, you are a better investor!
- This investing, using your saving, brings financial freedom in future.Investing uses your saving to help you in times of need.
- Fear of future: Looking at your future financial goals can bring fears of eroding the power of money! What amount you would need to pay for your child's education, say for a graduation of Rs. 10 lakhs could cost you Rs. 25,93,700/- at increasing cost of 10 % every year seen in the past 10 years actually.
- Mental peace comes from such understanding and taking steps.
- Money works for you and you don't work for money: When your money starts bringing you money, without having to work for money!
- It is possible with understanding the two factors: inflation and power of compounding!
- Inflation has created the difference between saving and investing: We don't know our future! You save so that we can overcome future difficulties.
- Investing from your saving saves you from overcoming future unexpected worries and thus beating effectively.
- Following diagram explains the value of money while you invest. So, check! Is your money "invested" in FD (fixed deposit) really giving you "returns" ? No! Understand from this diagram that FD would give you a return of perhaps 6 % and inflation is also around the same -6 % or perhaps 7 %, Then add tax! So, eventually, you value of money is eroding and going to give you negative return effectively.
- Mental satisfaction: by knowing and understanding the value of your future money, you will have the mental satisfaction that you are prepared or are preparing for this effect of inflation.
- For a successful investor, you have to understand inflation!
- Investing is a financial freedom: First inflation and then knowing the expected returns from each asset class, and then investing, will give you the feeling of being financially free. You can say to yourself, that now I am investing, free of any other factors.
- How does inflation affect your wealth?: The following diagram explains the eroding value of your wealth if you are not observing effect of inflation.
- Therefore, you have to effectively beat inflation, know the current inflation rate for your respective goal category also. then invest.
- The rupee is not an asset and fixed deposit is not appreciating and is depreciating
- Wealthiest People: Those who accumulate assets of this three kind, become wealthy
The richest person in the world is evaluated in his maximum investment in equities or ownership of equities, not from gold or properties.
Lets do some learning simple exercises:
- Children's Education calculator: Open this excel and put in your amount, years, and enter, you will get the future value of the amount that you would need in future. This is when you take inflation into account.
2. Retirement Calculator: Open this excel and put in your amount, years, and enter, you will get the future value of the amount that you would need in future. This is when you take inflation into account.
3. Money Worth Calculator:Here, you can understand the value of your current money, what it would be able to buy 10-20 years from today. Open this excel and put in your amount, years, and enter, you will get the future value of the amount that you would need in future. This is when you take inflation into account.
While Saving or investing, please remember the effects of inflation and then invest.
The credit of images and some excerpts from https://economictimes.indiatimes.com/wealth/invest/inflation-crosses-red-line-heres-how-your-investments-can-beat-it/articleshow/53682355.cms