If you’re not paying attention to inflation while investing, it could seriously impact your savings. That’s why it’s so important to consider inflation when you’re planning your investments.
We all know that inflation can eat away the value of your money and make everything more expensive. Right now, India is witnessing high inflation, and the Reserve Bank of India (RBI) is working to get inflation numbers down because it’s a big concern for everyone.Should inflation remain elevated, your existing expenses may nearly double. Furthermore, if inflation were to increase slightly, those costs could escalate even further. This situation is indeed quite revealing, isn’t it?
If you’re not paying attention to inflation while investing, it could seriously impact your savings, cutting the value in half. That’s why it’s so important to consider inflation when you’re planning your investments. Let’s understand this more in detail and with an example.
How Inflation Affects You
To understand how inflation affects your finances, it’s essential to understand the math. Inflation measures the rate at which the general level of prices for goods and services rises eroding purchasing power. The formula to calculate future costs considering inflation is:
Future Value = Present Value × (1+Inflation Rate) Years
Assuming a long-term inflation rate of 6%, your current expenses amounting to Rs 1 lakh represent the present value. With the inflation rate set at 6% (0.06) and a time-frame of 10 years, we can substitute these figures into the calculation to evaluate your future expenses
Future Monthly Expense = 1,00,000 × (1+0.06)10 = 1,00,000×1.79085 = 1,79,085
If inflation remains constant at 6%, it would require around Rs 1.79 lakh each month to maintain the same purchasing power that currently necessitates Rs 1 lakh. Should inflation exceed 6%, this amount is likely to increase.
Adhil Shetty, CEO of Bankbazaar.com, says, “Something that costs you Rs 100 today might cost Rs 130 or more a few years down the line. This gradual increase in prices affect your savings. That’s why your investment planning isn’t complete without taking inflation into account. It’s not just about growing your money; it’s about making sure your money keeps pace with inflation. If your investments aren’t beating inflation, you could find yourself in a tough spot where your money loses value instead of growing.”
Future Expenses and Impact
igh inflation can have a big impact on your lifestyle. It is presumed that a monthly expenditure of Rs 1 lakh today is sufficient to cover essential needs such as housing, education, healthcare, food, and entertainment. Nevertheless, in a decade, the purchasing power of that same amount will not only diminish but will also require a considerably larger sum to sustain the same standard of living.
For example, if you have a family and you are currently budgeting Rs 1 lakh for monthly expenses, how do you plan for the additional Rs 79,085 needed in ten years? Will your salary increase at the same rate? Do you have investments that can keep pace with inflation? These are critical questions that require thoughtful answers.
Planning for the Future
1. Increase Your Income: It is important to keep exploring new opportunities and enhance your earning sources to make sure your income keeps growing with time.
2. Invest Wisely: Inflation can erode savings. Explore investments that historically outperform inflation. Diversifying your portfolio can help safeguard your wealth against inflation.
3. Budget for Inflation: Adjust your financial planning to include inflation. If you expect your expenses to double, start saving and investing more aggressively now.
In summary, inflation can profoundly affect your financial situation, especially in relation to your monthly expenditures. Recognizing this fact is essential for effective financial planning. Therefore, it is imperative for investors to take action promptly; do not allow inflation to take you by surprise!