When it comes to wealth, inflation is the weapon of Mass destruction. Hence, today, Let’s learn about inflation, because we all want to be financially secure and inflation is one of the most important topics which one need to understand for creating a sound investment plan for one’s future.
Basically inflation in an economic situation where prices of goods and services start rising. As things get costly the purchasing power of your money decreases, and you have to spend more money in order to buy the same amount of goods.
Inflation is measured in terms of percentage, for example, if the inflation rate is 5% that means the cost of goods and services in the economy have risen by 5% during the period. E.g. An item costing Rs.100 a year at 5% inflation will cost Rs.105 the next year.
Inflation affects your financial situation badly, As it is killing the value of our money which we have saved for our future. But inflation is not always a bad thing, it is also a sign that the economy is growing.
And let us not forget that along with inflation our wages also increase. Sure it is devaluing your money but you can escape that by having a sound investment plan.
If inflation is too high or too low both can be a problem in an economy, thus government closely monitors the rate of inflation from time to time and take necessary steps in
controlling it. They usually do it by increasing or decreasing the bank’s interest rate.
(Source : World Bank Data)
You can see in the chart above how inflation rate has continuously affected Indian economy. Every year it is eating up some amount of value from your money.
There are many causes of inflation, the most important thing is increased money supply in the economy. As People have more money demand for the goods goes up, Which directly results in price rise.
Sometimes when the inflation rate is very high it is termed as hyperinflation which is really not a good sign for any economy. (e.g. 50% or more)
We have always been taught to save our money for future because it is uncertain. But at the same time, we don’t even want to lose the value of our money. The best idea would be to invest that money where the rate of interest is higher than the rate of inflation.
While they are an extremely safe option like the Bank deposit which can give you 7 to 9% of return annually. It can definitely save you from inflation, but you don’t just need to beat inflation, you want your investments to grow in its value.
There can be alternative investment options like mutual funds and stocks based on an individual’s risk profile. Contrary to the common belief that is really not that risky to invest in stocks on mutual funds if you do it with proper planning knowledge and consulting an experienced adviser.
Take the route of investment into stocks/mutual funds/bank deposits based on the client’s profile if you want to protect your hard earned money from inflation. So choose an experienced Investment Adviser who can intelligently frame your future investment/financial plan.
There is a lot more to be understood about inflation, if you have any questions or views kindly post them in the comment box below.