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.
Also Read: NPS Calculator: How much to save in NPS today for a Rs 1.5 lakh monthly pension post retirement?
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
High inflation can have a big impact on your lifestyle.
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