Inflation is a word that one constantly hears in the newspapers and on the news – someone says it is 6% and someone else says it is 8% and the RBI generally says that they want to bring it down to 4%. Now what is this inflation and how does it affect us.
Say, last year you had Rs.1000 in your pocket and the price of a kg of rice was say, Rs.20, so you could have bought 1000/20 = 50kgs of rice.
Now, say you put the money in an FD at 8%, so at the end of a year you have Rs.1080 with you (generally, income tax will take a bite out of the earnings, but let us ignore that for now).
But now, the price of rice is over Rs.25 so in effect, you can buy only 1080/25 = 43.2 kgs of rice!
In short, your buying power has reduced considerably! So, would it not have been smarter to spend the money buying rice or other such staples one year back instead of keeping it in an fd?
I’m writing about this because I constantly hear from people that they are saving a lot of their money, but when I ask where do they invest, invariably their answer is – I avoid stock markets and like my money to be ‘safe’. Safe, where? In bank fds, post office schemes and the most common “I invest in Life Insurance Policies”!! These three options are the most common amongst the poor strata society. My opinion is that ‘investing’ in post office schemes and life insurance policies is a guaranteed way to remain poor!
So, what to do? Invest in things that have a chance of beating inflation – mutual funds and real estate are the most common investments that invariably give inflation beating returns over the long term.
We have to impress upon our kids that it is not enough to ‘save’. They have to put some effort in investing the money properly also.
Some good ones on inflation:
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
― Sam Ewing
“Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of at the culmination of your career”
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
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