There was a time when our grandmother recited us poetry of their childhood accounts before sleeping. We simply felt amazed when the tale of their lunch aired after some quirky introductions. We all grew up watching exchange of promissory notes for buying or selling fast moving consumer goods. Only candy or lozens were sold for coins. However, our grandparents lived on a time when coins could fetch a heart-warming lunch or dessert enough to put smile on your tummy. This is just a rewind for everyone as it helps us realize where we are standing now. Saving money at that time instead of investing was the foolish idea one could ever had. The reason is inflation – the general increase in price and fall in the purchasing value of the money. Let us take an example
How inflation reduces wealth
Rs 1 lakh in 1984 is worth just Rs 7,451 today. Unless we take care to grow our investments, inflation will make us much poorer in the end. Prices rise and what was worth a Rs. 100 last year is probably worth Rs. 5 or 10 or even 20 more this year. Inflation eats away at your savings, bit by bit. We all know this, but even then, we fail to incorporate this knowledge into our savings and investment decisions.
I am not just talking about examples like the ones above. We all fail to consider this when we put away money in supposedly safe deposits for long periods.
A lot of (well, some) people understand compound interest, but most do not appreciate the DE compounding effect of inflation. What compound interest gives, inflation takes away.
Since each year’s inflation occurs on top of the previous year’s inflation, it means the effect is just like that of compound interest.
Consider a situation where you invest Rs. 1 lakh of your money in a deposit, which earns you perhaps 7% a year. At the same time, prices are also rising at the rate of 7% a year. In such a situation, y our compounding returns will just about keep pace with the inflation.
So, take risk, invest your money but first find the correct doorway. Do not get carried away by big advertisements, rather get advice before digging a snake’s pit.
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