Does it feel like your hundred-rupee note doesn’t buy you as many things as it used to a few year ago?
Have you ever wondered why your Fixed Deposit interest rates fluctuate?
The answer to both the question is Inflation!
To understand our curious case of diminishing value of the hundred-rupee note, we must understand the effects of inflation on the overall cost of production of the things we buy.
Let’s see it this way:
Today, a simple toothbrush costs around ₹40–₹60, whereas a few years ago it was ₹10-₹20. One may think that the companies have an itchy palm or are simply making more profits, however, there is more to that.
Wondering why?
The employees working in the factory and demanding more salary, the skyrocketing cost of raw material due to extensive usage of toothbrushes, increased cost of transportation and dear fuel are some of the factors that directly contribute to the “expensive” toothbrushes stacked up in stores.
The effects of inflation are felt by every individual and does not discriminate between the rich and the poor. Of course, we never hear the rich complain about it, because they or their financial planners are well acquainted with the intricacies of inflation and plan their finances accordingly.
The problem at large is that people who do not understand inflation are always stretching that hundred-rupee note far too long while hoping for it to have the same value.
Inflation takes from the ignorant and gives to the well informed. — Venita Van Caspel
Any financial plan that does not consider inflation is just THE plan to keep you financially drained. Circling back, if you had simply assumed the cost of your toothbrush is still ₹10 and you set aside ₹40 to purchase it for a family of 4 members, then today you could only buy a single toothbrush.
This simple example helped us understand the impact of inflation on savings and investments.
A pragmatic financial plan should start by considering the effects of inflation and should evaluate your choices of investments.
Look at your wealth creation this way:
Blocking all your money in a bank savings account, with 2.5% to 3.5% interest, will actually lead to wealth deterioration as the cost of things you want to purchase is constantly speeding up at 7% to 8% annually.
Similarly, investing heavily in fixed deposits may not really increase your purchasing capacity since the rate of interest offered is usually marginally below the inflation rate.
So how do banks adjust their interest rates for Savings and Fixed Deposit Accounts?
One of the important functions of the Reserve Bank of India, any Central Bank of a country for that matter, is to try and maintain the Inflation rate within a certain desired value, typically 2% — 6%.
If the inflation is too high, then affordability deteriorates resulting in increased poverty. However, extremely low inflation for a long time negatively impacts the economic growth cycle.
RBI (Central Bank) tries to maintain the Inflation rate by controlling the availability of liquidity in the economy, which is driven by the interest rates.
If the Inflation trends higher, then the RBI raises the interest rates, which makes it expensive to borrow money. And, when Inflation is low, RBI lowers interest rates so that more people are encouraged to borrow money to start a business or execute projects. The Banks adjust their Savings and Fixed Deposit interest rates based on the interest rates set by the RBI.
At Finzard, we strive to align financial goal planning with inflation-adjusted values, representing the ideal value that one needs to achieve. Users also can forecast their net worth and other investments across different asset classes where inflation-adjusted projections are made to show them what their Investments may be worth in future.
Considering inflation while financial planning allows you to create a more realistic plan with a clear understanding that the value of the goal is going to be higher than today.
So, now that you are friends with the concept of inflation in financial planning, pull up your sleeves and let that planning keep you ahead of the inflation curve.
Take control of your Personal Finance Planning and Wealth Management, Download and Install Finzard — Your Personal Financial Wizard from Google Playstore.
For more information: www.finzard.com
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