‘Inflation is taxation without legislation.’ – Milton Friedman
Inflation is caused by an increase in the monetary supply of a country. The most common symptom of inflation – often mistaken to be its cause – is a loss of purchasing power of the currency over time or when the price of things go up with time.
You’ve probably heard people say things like I remember when you could get a samosa for a 1 rupee . Well the same samosa costs more than 10 rupees now because of inflation.
If you live in an apartment, it’s the same reason why your rent is going up every year or two.
Inflation rate in India averaged 7.13 % from 2012 until 2017 , reaching an all time high of 12.17 % in November of 2013 and a record low of 3 % in April of 2017.
That means every year the price of things go up by about 7% so your 100 rupees chocolate bar might cost you 107 rupees next year.
Inflation is like a sin. It is eating away the actual value of our money. Doesn’t sound like a big deal at first, but that means that every 11 years the price of things double.
If you don’t want your money to lose value, you need to put your money into an investment that grows your money.
Don’t Invest in Bank
So what do most people do? Put their money in their bank’s savings account because that’s a safe investment. Yes, and that safe investment is guaranteed to make you broke.
Essentially, Bank savings accounts pay you an interest rate of 5% if you are lucky. That means your money is growing by 5%. While that sucks, it sucks even more because the price of things are going up by more than 7%.
This is why the rich get richer because rich people won’t invest in the bank. The poor invest their money in the bank thinking it is a safe investment
In addition to that ,
- Inflation also affects our future planning .
- It also influences pensions and other government benefits.
You may be putting away money for a rainy day around the corner. But inflation is actually cutting your returns and in some cases generating negative growth.
With a fixed income, you are able to afford less and less. In a high inflation country like India and America, it is absolutely crucial to beat inflation and stay ahead of it. For that you need to spend your hard earned money wisely.
If you are planning for your children’s education, but don’t have the discipline to set aside funds and invest it to build assets and also to beat inflation, you should be worried.
Only certain investment classes allow you to beat inflation and earn some real returns. Equity is one of the few asset classes that beat inflation over extended periods of time.
And yes there is more risk involved, but I think it’s better to take some risk for a potential gain than a 100% loss in the bank.