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What is Inflation?

How Inflation Works And What It Means For Your Wallet?

Many of us have a general thought of what inflation implies: Stuff gets more costly. Obviously, inflation is more complicated than that. It assumes an entirely critical part in your everyday funds, from your income to the cost of your milk to the amount you’ll acquire on your retirement investment funds.

Not long ago, low inflation and high interest rates meant investors could easily get a good real return just by putting their money in the bank. That era is now over and hedging against further rises in inflation has become a priority.

What Inflation Means, and How It’s Measured

Inflation refers to rises in the price of goods and services.

Inflation is entirely simple. It’s simply the rate at which goods and services increment in value, and in turn, at which the rupee drops in value. For example, your latte now costs $5 instead of $4.50, which implies your dollar purchases less latte. It’s a similar old latte, however now your dollar purchases less of it, so in that way, your dollar has less value.

The Wealth Killer

When governments produce money out of thin air, it devalues the existing supply of money. Meaning the money you have today isn’t worth what it was yesterday.

And as the prices of everyday items like food and petrol increase, it’s going to take more and more of your debased money to buy them.

This can be a nightmare for anyone saving for retirement. Because that means all that money you’ve been saving is not enough.

It’s going to take more money to retire… more money to buy that beach holiday house… more money to travel… and more money to send your kids to school and university.

Not to mention, your fixed-income streams — like the Age Pension — will also take a hit.

Inflation makes your weekly cheques seem smaller and smaller, because you won’t be able to buy as much as you used to with the same amount of money.

It’s not fair. But you aren’t helpless either. You can protect yourself from inflation right now and still achieve your financial dreams — without having to hit the jackpot to pull it off! Here’s how…

How Inflation Affects Your Wallet

It’s easy for most people to feel the effects of cost-of-living increases in their daily life. But rising prices hit the lower and middle classes especially hard. Higher food, gasoline and utility costs mean less money remains once these necessities are paid for, leaving little for savings or discretionary spending. To compensate for the rise in prices, consumers tend to buy less, switch to less-expensive substitutes or drive farther to find bargains.

Why It’s Important to Keep Up With Inflation

If your savings plan is to simply sock away cash under the proverbial mattress, you’re actually losing money in times of inflation, because inflation decreases the value of your dollar. Your savings aren’t earning any interest, so you’re not keeping up with inflation.

Inflation Keeps Things Balanced

We enjoy super low petrol prices, but that’s not all good in the long term. Most economists agree: Inflation is a necessary evil. And, in fact, it’s not really evil; it keeps our economic system balanced. It also produces jobs.

In order to protect your future purchasing power, you need to invest in assets with the potential to deliver higher returns than inflation in the long-run. That generally means investing in growth assets such as shares and mutual funds.

Growing Wealth

If you had all your savings in the bank during that period, you would have missed out on an excellent opportunity to grow your wealth. While share returns fluctuate from year to year, over the long term they beat cash, and inflation, hands down.

Looking to the future, we expect that the various factors holding inflation down will continue for a while yet.

But this does not mean that we have drifted into a world of permanently lower inflation in India.

The experience elsewhere suggests that we do need to guard against inflation expectations falling too far, for if this were to occur it would be more difficult to achieve the inflation target.

5 ways to beat inflation

  • Shop around for the best interest rates on your bank accounts
  • Pay attention to the inflation rate
  • Focus on “real” returns after inflation
  • Don’t forget to factor in tax and fees
  • Go for growth: shares and mutual funds beat cash in the long run.

When considering an effective portfolio, investors can often overlook the looming threat of inflation on their returns, which is a growing concern.

Inflation vs Returns on different financial products

Fixed Deposit :

Investing in Fixed Deposits just retains its value, but people feel that they get good returns up to 8.5 or 9.0%.

Gold investment :

Investing in GOLD is considered the traditional way of investment and also it is consider as the best way to beat inflation. Historically Gold has always outperformed inflation. It has generated 13.66% annualized return since 15 years, which is almost double of the inflation rate.

Cash in the bank :

The worst thing one can do is to keep Cash in Bank account, instead of investing it in any product. The returns generated from this saving cannot beat the inflation rate.

Mutual fund :

A mutual fund is an investment in stocks so the returns are volatile here but if you consider it as a long-term investment product then you will realize that it has given returns way higher and beat the inflation rate by almost double.


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