Impact of Inflation on Savings
Inflation can affect the value of your savings in the long run. When you save, you must save keeping in mind the rising prices of commodities and services of tomorrow. A sum that seems significant today may not seem so many years from now. Therefore, it is suggested to have an additional cushion of investment. This ensures that your hard-earned money retains its worth, regardless of time and inflation.
Here are some things to know about inflation and how it can impact your money.
What is inflation?
In simple terms, inflation refers to the rising costs of commodities and services in the country. This implies that while a sum of ₹ 15,00,000/- may be enough for your child’s education now, it may increase to ₹ 25,00,000/- ten years from now. The rate of inflation can differ for each year and is an essential parameter for financial planning.
What happens when inflation goes up?
A rise in inflation means an increase in the cost of goods and services. This means that to purchase the same goods and services, you will have to pay more. This is called an increase in the cost of living. This also means that the same amount of money cannot buy you the same goods and services in the future. This is called a reduction in the purchasing power of money.
Saving and investing money can provide you with returns that can help you adjust for inflation in the future so that you can continue with the same lifestyle.
How does inflation affect your savings?
As explained above, the value of ₹ 15,00,000/- will change with the rate of inflation. If there is a 6% inflation, you will need to save an additional 6% to ensure that your savings can be sufficient to help you achieve all your long-term financial goals like your dream house, your child's education, your retirement, and much more. Hence, you should plan for inflation and start investing your money in financial instruments that can offer you higher returns to counter the effects of inflation.
Let us explain with an example.
Let us assume an inflation rate of 6% every year.
The below table shows how inflation affects expenses. Let us assume that a product costs ₹ 1 lakh today. The below table shows how much it will cost over the years due to inflation.
| Year | Expense amount |
|---|---|
| Start year | ₹ 1,00,000/- |
| 10th year | ₹ 1,68,948/- |
| 20th year | ₹ 3,02,560/- |
Let us now see how much a savings amount of ₹ 1 lakh will be worth in the future.
| Year | Expense amount |
|---|---|
| Start year | ₹ 1,00,000/- |
| 10th year | ₹ 57,299/- |
| 20th year | ₹ 30,862/- |
You can see that your expenses will continue to rise, while the value of your savings will keep reducing over time. This makes it all the more important, that you should consider inflation while planning your investments. Start investing your money in financial instruments that can offer you higher returns to counter the effects of inflation.
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How to plan for inflation?
There are various ways to plan for inflation. Some of these strategies have been given below:
- Create a strong investment strategy: A strong investment strategy can be the stepping stone for your future savings. A sound strategy and approach can help you tackle inflation and ensure adequate savings that stand the test of time
- Add inflation-indexed investments to your portfolios: Investments that offer returns that can counter the ill effects of inflation can help you ride out rising prices. Hence, you should look for investments that offer you inflation appropriate returns
- Diversify your investments: While traditional saving instruments might offer you secured returns and ease of accessibility, they may not be sufficient to keep up with the changing times. You must diversify and ensure that your money is efficiently invested for the long term in market-linked instruments. This will offer you higher returns as well as help you fight inflation
Conclusion
Inflation can be a hindrance to your saving funds if you do not account for it correctly. Therefore, you can invest in plans like ICICI Pru LifeTime Classic1 to get high returns in the long term which helps you beat inflation. This plan also provides a life cover^, securing your loved ones’ financial well-being in case of eventualities. Some of the benefits include:
- Assured payouts to your nominee in case of an unfortunate event
- Affordable premiums2
- Investment of your entire premium into funds of your choice, based on your risk appetite
- Free switches between multiple funds for better returns3 to increase your gains
- Financial rewards4 for staying invested
Before you invest or save for your tomorrow, make sure to also calculate how inflation is likely to affect you and your future standard of living. You can take an expert’s help or use an online inflation calculator to include an additional figure for inflation in your long-term financial goals.
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