How does inflation affect my finances?
Inflation is a rise in the general level of prices. To put it financially, what cost Rs 100 a year ago will cost Rs 106 today, when inflation is considered at 6 per cent. What it effectively means is that it will now take more money to buy the same amount of goods and services. As each year’s inflation occurs on the previous year’s inflation, it means that the effect is similar to compound interest.
Understanding how inflation impacts you is very important because the long-term impact of inflation could be the difference between your financial goal and reality. Moreover, it is not just your purchasing power that gets impacted with inflation, even your investments are impacted because when inflation is high, and interest rates go up, it results in lower bond value and weaker stock prices. For your money’s worth to be meaningful, it should be put in instruments that will not just match inflation rate, but will also beat it. It is for this reason that when setting in financial goal, you should factor in inflation for the goal to realise.