What decides the value of money
Let’s just think about what makes 100 Rs more than 90 Rs ?? If you for a moment avoid your mathematical brain and think about it from a financial point of view; you can very well say that 100 Rs is more than 90 Rs because it can buy you a few more ml of white rum into your cocktail .
Well, anyone reading this will feel I have had a bit too much of this cocktail and might not want to go further reading this blog . But hey, if you don’t find the blog useful the party is on me .
So here we go : –
100 Rs is more than 90 Rs because it has more purchasing power OR The purchasing power of 100 Rs is more than that of 90Rs on that given day ( lets say its a day in 2018 ).
With time this purchasing power changes and the driving factor for this change is “ Inflation “
How Inflation reduces the purchasing power:
So lets say, after a couple of years in 2020; the same 100 Rs cocktail costs 120 Rs now; and that is because of inflation. So the purchasing power of 100Rs has decreased as it no longer can buy you the same drink which you could buy earlier .
So if you had lent 100 Rs to your school friend in 2018 and get 115 Rs in return from him in 2020, you have deprived yourself the same drink in this school reunion of yours. To make it worse , you find your friend with a glass of Chateau Lafite and feel embarrassed thinking how he could afford it .
Well , the answer lies in this most overheard term of Inflation but has unfortunately gone out unheard during your financial planning calculations.
You will gain in real sense out of your investments not when the mathematical value of your capital investment increases ; but when the purchasing value of the capital amount will increase .
What are positive real returns?
Your investment should make more returns than the inflation, to say that your investment has gained positive real growth. To make it simple, an investment giving you 10% per year returns is good if the inflation is 8% per year , but the same investment becomes a bad investment if the inflation is 12% year.
So Go back to the title of this blog , and don’t subject your investments to inflation risk. The latter- Reading all scheme related documents carefully is really not so needed though, as I will be back with my next blog about details about inflation; so reading that itself will suffice.
In my next blog we will try to find out the inflation statistics in our current day scenario taking some daily life examples .
Meanwhile, if you are still confused between the maths and economics of this cocktail drink, contact me on www.finbull.in, we will help you come out of this hangover for sure .
After all, this hangover has been continuing since years wherein we have invested huge sums of our money in conventional instruments being unaware about Inflation .
And as I said earlier, the party is on me. So get in touch with me at:
2nd Floor, RK Business Centre, Cement Road, Shankar Nagar,Nagpur-440010
“Inflation is taxation without legislation” : Warren Buffet