Basics

Basics of Finance
What is the impact of inflation on savings Can investing help me beat inflation?

Rising inflation increases the cost of living, leaving a dent in your savings; investing in different instruments can offer a solution to this problem.

In economics parlance, the term 'inflation' means an increase in the price of goods and services, resulting in a fall in buying power of money. Hence, inflation rate is the percentage of increase in prices. Now, let us understand how it impacts your savings and what measures can be taken to beat inflation.

In order to beat inflation, you must invest in financial products that have a higher rate of return than the rate of inflation.

Impact of inflation on savings

Increase in inflation indicates an increase in price of goods and services at a certain rate. However, the amount you save from your income every month may not increase at an equivalent rate. Therefore, the price rise puts pressure on your savings. After a few years, the amount you have saved will be able to buy lesser number of units due to increase in prices.

The impact of inflation on savings can be explained with the help of a simple example.Suppose you have Rs 1,000 today, and the rate of inflation is 1 percent per year over the next 10 years. This means that a product selling at Rs 1,000 today will cost Rs 1,105 after 10 years. However, the amount that is lying in your safety vault(Rs 1,000) will remain the same even after 10 years. So, technically, you are losing Rs 105 in 10 years without even spending a rupee from your savings.

Investment can help beat inflation

As seen in the above example, the value of money drops over time if you simply store your savings in a safety vault. Therefore, in order to beat inflation, you must invest in options that have a higher rate of return than the rate of inflation. So, using the above example, you must earn at least Rs 105 on your Rs 1,000 in 10 years if you want to beat inflation.

There are several instruments you can invest in: stocks, gold, fixed deposits, corporate and government bonds, property, etc. are some of them. You can invest a part of your money in each of these instruments to grow your savings and beat inflation. In case you are unsure about the type of investment, you can consult with a financial expert who can throw light on the different options that are suitable for you.

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