Inflation, in simple terms, is a surge in the price of materials and services. It decreases the worth of your money and reduces your purchasing power. When there is a rise in the inflation rate, you buy fewer things with the same amount of money. You have no control over the inflation rate. If you are to stay ahead of inflation, you need to have more money to purchase the extent of the goods you intend to in the future with the money you have today. But, money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To earn returns, you need to invest. Therefore, making investments is necessary to tackle inflation. Inflation at the rate of 8% means that you need 8% more money than what you have to purchase the same item next year. Here’s how inflation at 8% reduces the worth of Rs 1 lakh over eight years:
Amount in hand now | Rs 1,00,000 |
After one year | Rs 92,000 |
After two years | Rs 84,640 |
After three years | Rs 77,869 |
After four years | Rs 71,639 |
After five years | Rs 65,908 |
After 6 years | Rs 60,636 |
After 7 years | Rs 55,785 |
After 8 years | Rs 51,322 |
It is very important to earn inflation-beating returns, if not, you may not be able to afford materials and services in the future from the savings you are making now.
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