We have all heard of media making a great fuzz about inflation. However, how many of us have taken efforts to understand what inflation is and how it is going to impact our daily life.
Inflation is not something that ought to be discussed by financial experts alone. It has the power to destabilise the life of a common man. It affects our financial health- the value of our investments and our retirement life.
What is Inflation?
Inflation refers to a slump in our currency value and an increase in the value of our day-to-day expenses over a period. It is calculated in percentage. The rate of inflation varies for each commodity as it differs for education, wholesale, retail, household, housing, lifestyle and so on.
Let us take the case of education as an example. While in 2009, the fee for Management Studies in IIM costed 5 lakh Rupees, the very same course amounts to around 21 lakh Rupees in 2019. This means that there was observed a growth in fee of 15 percent every year in a span of 10 years.
How can we foresee Inflation?
Let us see this with the aid of an example. If you are planning the higher education of your 8-year-old child, then calculate the current estimate of the course and the rate of inflation in the next 10 years.
If the current budget of the course is 10 lakhs and the rate of inflation is 15 percent, the budget for the course will be more than 40 lakhs in 10 years. So, while investing monthly for long-term with a lump sum amount in mind, you will need to consider this inflation rate. Otherwise, the amount invested with education in mind will not be sufficient.
In short, while setting a goal you will need to understand the following:
- What inflation is and how it works
- The current expense of your goal
- The time period to achieve this goal
- The rate of inflation in the specific sector
As in the case of education sector, you will need to calculate the rate of inflation for health sector before creating a budget for retirement life.
Understanding the science behind inflation will help you anticipate and plan ahead for better investment results thereby meeting your personal investment goals.