How does inflation destroy your money?

Inflation a Financial Evil | Inflation (inflation) has a great impact on our lives. Increasing inflation reduces the value of our money and our savings do not work. So through this article, I am going to tell you how inflation kills our money.

Inflation Small Analysis

What is inflation?

The rise in prices of goods and services over time is called inflation. Due to rising inflation, your savings are of little importance. Inflation reduces the value (money value) of the money you have saved and invested. This reduces your purchasing power. This can be understood through an example like - if you earn 6.5 % from a FIXED DEPOSIT in a year and the inflation rate is 4%, then you earn only 2.5 % in real terms. It is also called the actual rate of return. The 6.5 % return you get from a FIXED DEPOSIT is called the nominal rate of return. You can understand inflation in such a way that ten thousand rupees of 1982 today is equal to approx. ₹ 552.

You are only living in confusion, there is no benefit.

Suppose you invested 2 lakh rupees in FIXED DEPOSIT in a bank, which provide returns at the rate of 7% per year and the prices of goods and services are also increasing at the rate of 7% per annum. In this case, your invested amount will increase, but it will not benefit you, because inflation has also increased at the same rate with your amount. You can use the rule of 72 to find out how long it will take for your money to double. 

In this, you have to divide 72 by x ie 72 / x, here x = rate of return from the investment. If you are getting a 6% interest on your investment, then 72/6 = 12 years. Meaning at this rate it will take 12 years for your money to double. 

Now suppose 12 years ago that you invested Rs 1 lakh, which has become two lakh rupees. Earlier, the items which you could buy for one lakh rupees have now become two lakhs due to inflation, so what did you gain? Meaning the increase in money just confuses you. Therefore, we can understand that it is decided by the increase and decrease in the value of goods and services that your earned money will provide you benefit or the situation will remain the same.

Inflation making you poor

Suppose you get a 6% return on your investment and average inflation is 8% over a 15-year period. If you look at this that then you will find that even after investment you have become poor instead of becoming rich. Your money was reduced compared to inflation. This is often the case with people that they believe that our money is increasing and will become richer in the coming years, but the opposite happens. Therefore, while investing, inflation should always be kept in mind and based on this, the estimated return should be fixed.

Is one crore rupees enough for retirement?

Suppose you invested in equity growth mutual funds through SIP, keeping in mind your retirement. At present, you are 30 years old and you want one crore rupees at the age of 55 at the time of retirement. According to you, you will get a return at an estimated rate of 9% and you invest ten thousand rupees per month. In this situation, if you calculate with a SIP calculator, you will get Rs 1.12 crore from it. But keeping in mind the effect of inflation, you will get only 45 lakh rupees. In this way, you see how much your money is reduced by inflation.

Make an investment that can reduce the impact of inflation

The first rule of investment is to invest based on the risk profile. Risk and return in investment are only two things. If there is more risk, there will also be more chances of higher returns. Generally, general investment prefers to invest in an option that has less risk even if it has lower returns. 

General investors usually invest in PPF, FD, NSC, Senior Citizen Saving Scheme (SCSS) or post office schemes. Assuming average inflation is 5%. FDs give around 6.25–7% a year. PPF and NSC are currently offering 7.9%, SCSS 8.6% and Post Office deposits 7-7.7%. 

This kind of investment can not beat inflation. 

If you are an aggressive investor and consider equity mutual funds or tax-saving mutual funds such as an ELSS or equity-linked savings scheme, you will find that equity mutual funds can give 8-12% returns in a year. Inflation will not have much impact on the returns received and your money will increase compared to before.

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DISCLAIMER 

The information provided in this article is for general informational purposes only. All efforts have been made to provide accurate information in this document, however, it should not be perceived as professional or legal advice. The reader should consult a professional before making any decision based upon this document. Under no circumstance, the author or the publisher shall have any liability to you for any loss or damage of any kind incurred as a result of the use of this information.