Did you know that inflation could sabotage your dreams of the future? Let’s explain how. Let’s first talk about inflation. Inflation refers to the increase in prices for goods and services from one year to another in a country or economy. Inflation means that the purchasing power of the economy’s currency decreases with each passing year. If a packet of biscuits was priced at INR 20 last fiscal year, and inflation is currently at 5%, this same pack of biscuits will now be INR 21. You will need to spend INR 21 this year to purchase the same biscuit pack. Or, the Rupee’s purchasing power has fallen by 5%.
Inflation will result in an increase in the cost of all things we consume annually as shown by the example above. This means that the cost of living will rise every year because products and services are more expensive than they were a year ago. This means that we will need to have more money in the future to buy the same item as we do now. This is why you should ask for a good salary increase every year to ensure you have enough money after you remove inflationary effects from your increment. If your boss offers you a 12% increase, don’t be too excited. The real effective increment or hike that you will receive is only 7% after inflation has been removed.
You may think, but this is all common knowledge. Why is it so important? Inflation is something that everyone has to deal with. Why should I be concerned about it? You should be concerned about the fact that inflation will slowly consume your savings. When you consider the compounding effects of inflation, what you’re currently saving may not be enough to meet a financial goal. You might be saving for retirement, college education, or your child’s wedding. It is possible that you have assumed certain costs for future funding of these goals. Have you considered the inflation impact on the future value of these goals as well?
Let’s use an inflation calculator to help us make some real-world comparisons in our lives. The inflation calculator will help you determine how much you will need to pay in the future to cover your current expenses. It will tell you how much you’ll need to pay for an expense costing Rs. X is today.
Let’s look at an example to show how this calculator works. Let’s say you are 30 years old and your monthly household expenses is INR 35,000 Your retirement phase is expected to start in 30 years. You plan to save enough. How can you calculate how much money you’ll need each month to maintain a similar lifestyle in 30 years? Inflation calculator will work if you enter the following information: Current Value = 30,000, rate of inflation = 5%, and time period = 30 years. This calculates the future value of your monthly expenses that grow at the same rate as inflation. It assumes that you will live the same lifestyle at 30 years old. It is 1.3 lakhs per monthly. This is how much money you will need each month to maintain your 60-year-old lifestyle. The amount you need to improve your life, which will happen when you retire, is more than 1.3 lakhs.
Historical data from India shows that the inflation rate averaged 7.7% between 1969 and 2013. Can you see how inflation could wreak havoc on your dreams? It can slow down your savings and eat away at a portion of your dreams. It is crucial to start investing early so your savings can grow at a faster rate than inflation. This will allow you to retire with a more comfortable lifestyle. As a senior citizen, you will need to live a more comfortable lifestyle than a youngster. At 60 you can take the metro or bus, but you’d rather take a taxi or have someone drive. Won’t you?
How can one plan for the future so that inflation is not a problem and one doesn’t lose his/her hard-earned cash? A few equity mutual funds are a great way to beat inflation and reach your long-term financial goals. These funds can help you build wealth by allowing you to grow your capital over a long time period. These funds are a great option for retail investors looking to invest long-term. Visit any mutual fund website to find its mutual fund calculators.
These calculators can show you how much a 1 lakh investment in Fund ABC over a period of X year could earn you in the future in INR Y based on historical NAV data for Fund ABC. Mutual funds offer diversification and access to professional money management.