Think Investing Is Overrated? Inflation Says Hi!

Don't Want to Invest? Well, Inflation Is Going to Make You Reconsider

Have you ever wondered how the inflation rate impacts your savings? We are providing this article to help you understand how the inflation rate reduces the value of money and what you can do about it.

Inflation happens when more currency is created, increasing the prices of goods and services, thus reducing the value of money that you have saved over time and invested in something like a 401k plan. Here are 8 ways how the inflation rate affects your best monthly saving scheme and what you can do about it.

1) Basic human needs: rising prices are making them harder to meet

Rising prices are making it harder for people to meet their basic needs. According to a report from the Organization for Economic Co-operation and Development (OECD), people in countries such as Greece, Portugal, and Spain spend up to 40% of their disposable income on food.

For some families, this means that they are not able to meet other needs such as clothing, schooling, or healthcare because these expenditures make up a smaller portion of their budget.

2) Even little indulgences cost more

It's not just that prices are going up. It's also that wages are not keeping up with the rate of inflation. With wages growing at a slower pace than inflation, people have less money to spend, which in turn drives up prices. 

So now what used to cost Rs 100 might cost Rs 150 or Rs 200. A standard economic measure of this phenomenon is called the inflation rate.

3) Small savings don’t save much anymore

India’s inflation rate is at its highest level in a decade, hitting 7.3% last month. That means that prices are going up and money loses value every day.

For example, if you put aside 100 rupees ($1.66) today, it would only be worth 74 rupees tomorrow ($1.47). That’s because your savings are fixed at a certain price while prices are increasing due to inflation.

4) A big ticket item isn’t as big a deal

Just because you can afford the best monthly saving scheme doesn’t mean you should buy it. This seems to be a lesson many people are learning right now.

For example, I was out shopping today and saw someone who looked like they were my age buying a pair of shoes without batting an eye. That’s more than I spend on food each month! I could never do that, but if they can afford it then good for them.

5) The real cost of borrowing goes up – and so do interest rates

In general, when inflation increases, the value of money decreases. When this happens, a person would need more money to make purchases that would have been cheaper at a lower rate of inflation.

As a result, not only are your savings worth less each day as you wait for them to mature and grow (interest rates are low now), but you also pay more in loan interest to get what you need today. And if your salary remains stagnant while prices keep rising year after year? Your purchasing power will steadily decrease!

6) Services cost more than goods

A recent study on inflation conducted by insurance companies in India has indicated that prices for goods and services have been increasing at a faster pace than what they were last year.

This means that people are having to spend more money on things like food, fuel, clothes, healthcare, and education because these prices are also increasing.

7) Saving for your retirement takes longer and eats into your other savings

Inflation reduces the value of money, so it takes more to buy what you need. The less buying power you have, the harder it becomes to save for your retirement.

This means that you'll have to work longer and save more than someone who can take a cost-of-living adjustment each year. It also means that you may not have enough saved up when your retirement time comes around.

8) Prices go up faster than wages do

The inflation rate is a measure of how much prices for goods and services are rising. It's calculated by looking at changes in the price index by insurance companies in India, which looks at how many goods and services one unit (e.g. a kilogram) can buy or its equivalent money value, to see how much that money buys you over time.

When prices rise faster than wages do (or it takes more money to buy an item), people's incomes don't go up as fast as inflation levels, and their purchasing power decreases.

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Conclusion:

The inflation rate measures the increase in the price level of goods and services over time. There are many ways in which the inflation rate can negatively affect people's lives and one of them is reducing the value of money. Theoretically, if the inflation rate stays at zero percent annually, then one dollar buys you the same amount of goods and services at any given time as it did in the previous year. However, this theory from insurance companies in India cannot be applied to real life, because it never happens.