How Inflation Makes Money Less Valuable.

If you are a newbie to the world of finance and don’t know where to start this article will lay a foundation for your understanding about money.

If you have been parking your money in different schemes and fund houses without understanding the ROI and the adverse effect inflation has on it, then, this article is for you to correct yourself.

Most people invest their money in multiple insurance policies with a blind faith that they are covered in cases of contingencies. But sadly their money is losing its value due to inflation and they aren’t aware. There will undeniably be a shortfall in times of need . Are you one of them?

By the end of this article you’ll be capable of understanding how to choose an investment avenue.

Youl’ll also understand the difference between savings and investments. When to save and when to invest.

Consider this example. You give your granny Rs 1000 and ask her to return it to you after 5 years. You forget about it anyway. But she promptly returns it to you after 5 years. The same Rs 1000 note. Receiving money with a surprise is always a joyous moment!

But hey, you could buy better things with the same 1000 rupees 5 years ago than today.  Agree?

But you are happy because your granny saved you 1000 rupees.

This is saving money. It just means, accumulating money. There isn’t virtually any or much return on it.

This is very similar to parking money in savings bank account. Money gets accumulated but the returns are as low as 2.5-3% per annum.

Instead you could use this  1000 rupees, park it in other avenues and earn about 14-17% return per annum. Yes, such investment avenues exists.

The situation where return on your money beats the average inflation rate of about 7% is called ‘investment’.

To make this simpler for you, firstly understand Inflation.

Remember the jingle “Paanch rupaye ka maggie lana”? Maggie used to cost 5 rupees around 6-7 years ago and  today the same quantity of maggie costs about 12 rupees.

Remember,  6-7 years ago milk would cost Rs 28 per litre. Today the same milk costs about 37-42 rupees. Has milk got better? Has it got more nutritious? No!

But goods and services are becoming expensive day-by-day and money’s purchasing power is falling.