Inflation is a monster that can eat your savings: The antidote? Investments

Inflation may be something not many people understand but we all feel its impact. We all experience it when we step out to buy our groceries, when we are likely to spend a lot more than our budgeted amount. That’s inflation.

The size of a bar of soap has gradually decreased over the years although the price is the same. That’s inflation at work.

It’s important to understand how inflation works as well as the effects it could have on your finances. Inflation is increase in the value of money over time. Inflation not only affects the cost of living -- like the prices of groceries, transport and electricity -- but it also impacts interest rates and returns on your investments.

It naturally impacts your buying power as you are now able to buy less with your money.

Inflation affects your wealth

When it comes to the cost of living, accelerating inflation means it becomes more expensive to maintain your current lifestyle. If your income doesn’t increase or at least be in alignment with the rising inflation over the time, then your buying power will fall, thereby making it difficult to sustain the current standard of living.

Inflation not only affects your day-to-day expenses, but also has a huge impact on your savings, pension and investments.

Also read: Russia Ukraine war can push up inflation: But there is a way to beat it

The risk of saving and not investing

The cash that lies in our bank accounts just lies there. It does not work for us. It doesn’t even give us any returns.

Keeping money in your savings account will only fetch you 4 percent, whereas the current inflation is 4.48 percent. Your real rate of return (return less inflation) is negative. In simple words, you lose money.

Just give it a thought how your own cost of living has changed since you were a kid. A high rate of inflation with a low rate of interest results in poor returns on your savings. Instead of just saving, you must start investing.

Why retirees should worry about inflation?

Inflation has been rising consistently, but is your pension increasing consistently? This is the other concern.

Inflation erodes your pension fund. The retirees who rely on fixed annuity plans will see their purchasing power diminishing over the years. We often hear people saying that they would not spend much after retirement. But the reality is that the daily cost and standard of living either remains the same or increases over time, even in retirement years.

If your retirement is just a few years away, say 5-10 years away, allocate 40% of your corpus for investment avenues like equity mutual funds or direct equities so that it will yield higher returns, which can easily beat inflation. Allocate the remaining 60% for debt funds to meet your monthly expenses. Make sure to use alternative strategies to ensure that your funds are growing and giving you positive real returns.

Inflation affects all spending, but it affects healthcare the most. In other words, if retail inflation is, say 6 percent, then healthcare inflation could be around 12 percent. Consider this when you plan for your retirement.

If you have huge financial commitments

Say you are saving up for your child’s education. Assume the cost of your child’s college degree is Rs 30 lakh. And you need the money after 10 years. Also assume the inflation rate is 6 percent. How much money would you need after 10 years?

Answer: Nearly Rs 53 lakh. Just savings will not help you reach there. You need to start investing wherein your money will compound and reap higher returns, which can help you successfully achieve your goals.

Remember, every rupee saved today will buy a smaller quantity of a product or service tomorrow. Even if you retain your current standard of living, as years pass by, you will be spending more money maintaining the same standard.

Therefore, make sure that you invest wisely in order to combat inflation over the long term. Ensure that your money works and multiples so that you can enjoy the same standard of living even after a decade. Investing wisely will not only help you overcome inflation but also in achieving your financial goals successfully.