The rise in the prices of goods and services and, subsequently, the fall in the purchasing power of each rupee is called inflation. As inflation rises, every rupee will buy a lower quantity of goods.
Inflation is one of the main factors that reduce the value of your money over time. It means that the money you have at the beginning of the year will get you lesser goods and services at the end of the year. As the prices of even basic goods go up over time and during periods of high inflation, even if you carry on with your normal life – eating the same food, travelling to the same places, etc. – either you need to buy smaller quantities, cut down on the total items you purchase or end up spending more.
To combat inflation, you must avoid keeping your money idle (in cash) or in your savings account, which offers negligible interest in real terms. Instead, you must invest your money in investment options where the returns from the investments are higher than the inflation rate.
Investing wisely will not only help you to overcome the problem of inflation, it will also help you achieve your financial goals successfully.
Let’s understand the impact of inflation on saving and investing with an example. You tend to park all your money in a bank savings account that for example earns 4% interest per annum. Your friend Rahul, on the other hand, invests his money actively and is able to generate an average return of 12% interest per annum. Who do you think will be able to counter the impact of inflation better over a long period? Naturally, Rahul will be far better off than you in terms of dealing with inflation and building wealth.
At the end of the day, who would you rather be? Someone who barely increases the value of your money or the smarter someone who makes smart investment choices and manages to create wealth out of it too? The choice is yours!
Before we end this, a few concepts of inflation must also be reviewed in its alternative forms:
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