Inflation is the continuous rise in prices of goods, services, and any other financial asset over a period of time. As it is a gradual process, it lowers the value of the rupee and increases the price of various tangible and intangible commodities. At the end of a saving tenure, it can be surprising to see that your efforts haven’t reaped much, and the value of your money has reduced, if not remained the same. There is no way to escape inflation, but there are ways to beat it. And learning the impact of inflation on your money is the first step towards nullifying its depreciating effects.
How does inflation impact your savings?
Inflation works on a simple principle and affects every purchasable or usable item. As consumer needs and demands grow, the prices of goods and services increase, which reduce the purchasing power of the rupee. For instance, if a Cadbury chocolate bar cost Rs. 5 in the 1990s and Rs. 30 in 2021, that is the work of inflation. This means you will have to shell out more money for something that cost you much lesser earlier. In the Cadbury example earlier, the spike in price is still lower. But the rise in costs for necessities such as property, healthcare, education, and transportation have been high – conveying that the inflation rate differs for various commodities and services can be minimal or extreme.
At present, the average inflation rate in India is around 6%. But when you look at the price of goods or services separately, you will see diverse trends and inflation rates that range between the high and low spectrum. It can be a value as low as 3% to that as high as 155% over a few years. So when you are saving for a particular goal, inflation can eat away at your final amount of savings. If your money remains stagnant, that is, not grows alongside the increasing inflation rate; it is as good as not saving it at all.
For instance, if you open a savings account that keeps your money safe but accumulates no interest on it, the value of your money will decline down the line. If you open a fixed or recurring deposit account that grows your earnings up to 5% or 6% each year, but the inflation rate is also around 6%, the value of your money will be the same as the present inflation rate. In the first scenario, you will face a loss, and in the second one, you will earn zero profits. This ultimately means that you will be spending more and getting lesser in return.
That is why it becomes vital to counter the impact of inflation with inflation-adjusted savings plans and investments.
How can you counter inflation?
Simply saving your money will not help you negate inflation. To counter inflation, you should put your income/ earnings in savings and investment avenues that promise returns higher than the inflation rate in a particular year. There is immense opportunity and plenty of wealth-creating options you can choose from. Broadly, the financial market is divided into two categories – market-linked and non-linked. Non-linked products give low to mid-level guaranteed returns at fixed interest rates, whereas market-linked products give high but non-guaranteed returns at fluctuating interest rates. Both savings/ investment types are must-haves to grow your wealth in a safe and risk-balanced manner. Non-linked avenues include products such as savings plans, life insurance, government funds, and the like. Market-linked options include equity, debt, and hybrid assets such as stocks, mutual funds, systematic investment plans, unit-linked insurance plans, and more. The plethora of savings and investment avenues ensure you have multiple choices to multiply your wealth. All it takes is a little research and financial guidance to understand which ones align with your financial goals and give you the desired returns.
The bottom line:
Inflation will always be around and is a phenomenon you cannot stop. However, you have the choice to move ahead with the times and control how you deal with its effects. Strategic savings and investments are the only way to fulfill your goals and not compromise yours and your loved ones’ needs in the long run.
