Just keeping money or investing it where the returns are lower than the rate of inflation will reduce your purchasing power over a period of time.
If you keep a Rs 100 note in your pocket, and take it out one year later, will the worth of that note still be Rs 100? The note will still remain a hundred-rupee note, but do you think its worth will still be the same? It won’t, because whatever you can buy today with that Rs 100 note would no longer be available for Rs 100 one year later. Do you remember the prices of milk or petrol 10 or 15 years back? Do you remember how much you used to spend on shopping for clothes before? You can think about the amounts needed for these same purchases today. Just keeping money or investing it where the returns are lower than the rate of inflation will lower your purchasing power over a period of time.
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Apart from this, there is one more factor to be accounted for, that is lifestyle inflation. Over a period of time, your demands will also increase. There were no smartphones, tablets, or Netflix 15 years ago. You can’t imagine life without most of these things now. Most of the things which used to be luxuries have become necessities now. So, you can’t avoid spending on them completely. All these factors which are going to increase your expenses in the future need to be kept in mind. That’s why you need to beat inflation.
Inflation can impact financial planning and make a dent in your purchasing power. Let’s understand this in two ways. One way is to see how inflation will increase your monthly expenses. If your monthly expenses today are Rs 30,000, then assuming a rate of inflation of 6 percent, these expenses would be Rs 40,146 after five years, Rs 96,214 after 20 years, and Rs 1,72,304 in 30 years. The lesson to learn from this is that while doing your financial planning, you need to account for the impact of inflation on your expenses. You cannot plan ahead assuming that the expenses will stay the same.
Reduced purchasing power
The second way to look at the impact of inflation is to see how the purchasing power of the money you have will be reduced over a period of time due to inflation. Once again, let us assume a rate of inflation of 6 percent. The purchasing power of Rs 1,00,000 will steadily decrease over a period of time. After 5 years, it will be equivalent to the purchasing power of Rs 73,400 today, Rs 29,010 in 20 years, and Rs 15,625 after 30 years. If you keep your money as is, with a low returns bearing product, the amount will stay the same, but the purchasing power of that money, that is the products or services you can buy with it, will decrease.
Thus, you need to make sure that your investments are made in products which give you good returns so that you can effectively beat inflation over the long term.
Rishabh Parakh is a personal finance strategist
and Chief Gardener of Money Plant Consultancy, an established firm providing tax and wealth management services across Maharashtra, Singapore and the UK.
Read his columns here.
First Published: Oct 16, 2019 6:00 AM IST