• 25 OCT 2017

    Effect of Inflation on Savings and Investment

    A penny saved is a penny earned. But owing to inflation in the economy, the value of the penny saved could be much lesser than when it was earned and saved. Inflation has a corrosive impact on our savings and investments. Therefore it becomes essential to understand the effects of inflation on savings and investments.

    What is Inflation?

    Inflation means an increase in the price of goods and services resulting in a decline in the purchasing power of money. Remember the cost of movie tickets 10 years ago? The cost is much more today and it is because of inflation. Likewise, we can say that with 2% inflation, a bar of chocolate that cost you INR 100 today will cost you INR 102 in the next year.

    How Inflation Impacts Your Savings and Investments?

    Every rise in prices is affecting your cost of living, leaving a dent in your savings and investments. The reason is, with the rise in inflation, the amount you save or invest from your income every month may not rise at the same rate. Therefore, the rise in price puts extra pressure on your savings and investments. Due to the effect of inflation, after few years, the amount you have saved will fetch you a lesser number of goods.

    Let us understand this with a simple example.

    Example of Impact of Inflation on Savings and Investments

    Suppose you have INR 1,000 in your savings account today. The interest you earn on your savings is say 5%. Therefore, after a year you will have INR 1,050 in your account. Now let’s say, during this period, the rate of inflation is 10%. This means that the price of a particular commodity which is INR 1,000 now will be increased to INR 1,100 next year. Now, even if your investments will grown by 5%, but the commodity price will grow by 10%. This leads to a negative rate of return or we can say that you will have to shell out more than what you will have at your disposal. Thus, inflation reduces your purchasing power and eats away your real return on savings and investments.

    After understanding the impact of inflation, let us see how to beat the impact of inflation.

    Safeguard Your Savings and Investments from Inflation

    In order to beat the inflation, you must invest in financial products that give you a higher rate of return as compared to the rate of inflation. Some of the investment options are investing in stocks, mutual funds, bonds, property, gold, systematic investment plans (SIPs), life insurance, etc. to name a few. Such investments will grow your savings and provide you hedge against inflation.

    How Can We Help?

    At Edelweiss Tokio Life, we provide insurance products that not only provide you safety and security but also acts as a wonderful investment avenue. In case you are unsure about the type of insurance plan, you can consult with our financial experts who will throw light on the different options that are suitable for you.

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