Inflation

A hundred rupees 20 years back is still a hundred rupees now. The amount doesn’t change, but there is a change, do you know what it is? Something which makes 100 rupees not worth as it was 20 years back.

It’s nothing but purchasing power. Yes, the purchasing power does not remain the same.

Let me give you an example: In the year 2000, one litre of milk was costing around ₹12 and now in the year 2020 it costs around ₹70 per litre. So, the purchasing power has reduced because of inflation. It’s a silent killer of your money. One rarely notices the impact of this inflation on his financial investment.

Most people take average inflation of the county for financial calculations. But to create a perfect process one needs to figure out what is his/her inflation is. That can be calculated by taking one’s yearly expenses. So, one must get into a habit of writing their expenses daily.

Now, coming to the investment part, one must have an idea of inflation about their goals. Because inflation for education will be different from the inflation of buying a home. And based on that one must choose the asset class which will beat the inflation and provides the purchasing power. Remember, if your return on investment is below inflation, your investment is generating a negative return or reducing your purchasing power. If it’s higher than the inflation, your investment is creating a positive return or increasing purchasing power.