Have you ever wondered why your hard-earned money doesn’t seem to be worth as much as it used to be? Why the price of everyday goods and services keep rising, even when your income remains the same? The answer lies in a simple economic concept known as inflation.
Inflation refers to the general increase in the prices of goods and services over time, which is caused by a rise in the overall demand for them relative to their supply. When inflation occurs, your money’s purchasing power decreases, which means that you can buy less with the same amount of money.
If you’re someone who’s not saving or investing in anything beyond a fixed deposit (FD), inflation can have a significant impact on your wealth. While FDs offer a guaranteed rate of return, they often fail to keep up with inflation rates, which can leave you with lower real returns on your investment.
Let’s take an example. Suppose you invested Rs. 10,000 in a fixed deposit that offers an interest rate of 6% per annum. At the end of one year, you would have earned Rs. 600 as interest, bringing your total investment to Rs. 10,600. However, if the inflation rate during that year was 7%, the purchasing power of your money would have decreased, and you would need Rs. 10,700 to buy the same goods and services that you could have bought for Rs. 10,000 at the beginning of the year. This means that even though you earned a return on your investment, you still lost money in real terms.
So, what can you do to beat inflation and make your money work harder for you? The answer lies in investing in instruments that offer higher returns than inflation rates. These could include stocks, mutual funds, real estate, or other investment vehicles that have the potential to generate higher returns over the long term.
In conclusion, inflation can have a significant impact on your wealth if you’re not saving or investing beyond a fixed deposit. By understanding the concept of inflation and investing in the right instruments, you can protect your wealth and make your money work harder for you.