You would have observed that the value of money keeps diminishing over time; do you know why? It is because of inflation, that lowers your purchasing power. So, when planning savings for the future, keep in mind the rising cost of things or factor the inflation!
Let us learn everything about how does inflation affect savings.
What Does Inflation Mean?
In simple words, inflation means the increasing price of commodities and services. For example, if you can buy petrol for Rs.100 per liter today, you may not be able to buy a liter of petrol for Rs. 100 after two to three years. The cost may rise to Rs. 105 or more. It is driven by supply and demand when the prices rise due to the increased demand or low supply of goods and services.
The impact of inflation is everywhere like groceries, FMCG, medicine, education, etc. Due to inflation, our purchasing power is reduced, and expenditure increases. So, at the time of doing financial planning, you should ensure to include the inflation factor.
The Impact of Inflation
Understanding how does inflation affect savings is crucial. Due to inflation, we need to pay more amount for the goods and services we buy or use. This implies that inflation eats away at our purchasing power. Over a few years, inflation lowers the value of our savings as the prices increase in the future. Your money doesn’t go anywhere or isn’t stolen, but it may not allow you to buy the same as much as you could have bought a few years before. So, you are left with the same money with a lower net worth in the future.
Keeping money in the savings account earns you interest. It may balance some inflation. But the inflation is higher than the returns. This is why your savings do not grow in the same proportion as the rising inflation.
Let us take an example to understand the inflation impact on savings and expenses. Suppose there is an inflation rate of 5% per year. A product that costs Rs. 1,00,000 today will cost Rs. 1,27,628 after five years. The same product will cost you Rs. 1,62,889/- after ten years. There are inflation calculators available online. You can use the same to determine the final cost after adjusting the inflation percentage and number of years.
This calculation depicts how a product or service’s price rises over a period due to inflation. So, something costing you Rs. 1,00,000 today will keep going higher as the years pass. The way inflation impacts the price keeps reducing the worth of money in the future.
Tips to Counter Inflation
If the rising costs are bothering you, brace yourself and know the effective tips below to counter inflation. These will help you build a robust savings plan in the future.
1. Start Making Investments
Making investments is the first effective thing to beat inflation. It lays a strong foundation for the future and avoids financial crunch. An investment plan factors the inflation cost and ensures sufficient savings. The money invested today will offer you good returns in the future. You can accumulate adequate savings if you get lump-sum money or monthly dividends. This will prevent you from getting hit due to inflation, and your purchasing power will improve significantly.
2. Diversify Investments
It is critical to include various investments in your portfolio. Ensure to include a diverse mix of high-return risky and low return non-risky investment products. Some investments offer inflation-beating returns that can help you survive high inflation. While traditional and safe options will provide a fixed return, they might not be sufficient to keep pace with the rising inflation. This is why including risky but high-return investments in your investment basket makes sense. These market-linked instruments may fetch lucrative returns in the long run.
3. Protect Your Savings
Another step to beat inflation and lower the inflation impact on savings is to protect your savings. Make a separate and untouched savings account for your future needs. You can also link the account with the fixed deposits.
4. Monitor and Adjust
Keep monitoring the inflation and adjust your savings and investment strategies accordingly. Keep yourself updated with the inflation rate trends. This will help you make informed decisions and increase your savings.
Wrapping Up
The fact that inflation is a hiccup in future financial planning cannot be denied. However, we can lower the impact of inflation on savings and prevent diminishing our purchasing power by creating a diversified investment portfolio, saving enough for the future, etc. To prevent losing your money due to the inflation impact on savings and growing your wealth, you should make many investments that can generate ample returns. If you neglect inflation, it can lower the value of your money and stop you from fulfilling your financial goals.
FAQs
1. What is the impact of inflation?
The effects of inflation include low purchasing power, an increase in the price of commodities and services, rising credit card and loan interest rates, etc.
2. Why is it important to factor in inflation while planning saving?
Ans. It is essential to consider inflation while planning savings and investments for the future to prevent falling short of money. Maintaining a lifestyle and fulfilling your needs will require more money tomorrow than today. This is why it is important to estimate the future cost based on inflation and then do financial planning.
3. Why is diversification important to manage inflation and increase savings?
Ans. You can manage inflation by making a diversified investment portfolio. You should spread your investments like mutual funds, real estate, stocks, bonds, cash, gold, etc. This will balance your risk and returns. It can also be used as a hedging tool against the rising inflation.
4. Is it essential to save money during inflation?
Ans. Yes. It is important to save money, even if it is a small amount. But to handle the rising inflation, you should make investments and go for inflation-beating investments with good returns.
5. What are inflation-proof investments?
Ans. The inflation-proof investment products help you outpace the inflation rate with its returns. Examples include gold, stocks, bonds, fixed deposits, real estate, etc.