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Understanding Inflation and overcoming its Consequence.

 Inflation reduces the value of money, which means that with the same amount of money, you can purchase lesser amount of goods and services than before. This happens due to a general increase in prices of goods and services. For example, at an inflation rate of 6 percent per annum, an item that costs Rs.100/- now will cost Rs.106/- next year.

The below chart shows how the value of Rs. 1,00,000 will reduce over a period of time(5 years, 10 years, 15 years and 20 years), assuming average inflation rate of  6%.


  • Individuals have little controls over inflation. However, there are ways to reduce the adverse impact of inflation on personal finances by:
  • Prioritize spending and cutting unnecessary expenses.
  • Diversifying your investments wisely in assets, which provides better returns than rate of inflation over the long term.
Focus on long-tern investments that have historically performed well during inflation, such as equities, mutual funds, gold etc. Over the long term, it has been seen that these assets provide higher returns than the rate of inflation.

Albert Einstein one said: " Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't....pays it".

Compounding allows savings to grow substantially over a period of time as it involves earning interest not only on the initial amount of money(the principal) but also on the accumulated interest over a period of time. In other words, it is interest earned on the principal and accrued interest.


MAGIC OF COMPOUNDING:

Growth of Rs.1,00,000 @ 10% per annum Compound Interest Vs Simple Interest for 20 years can be taken as example. 

After calculating, it can be observed, in a compound interest, Rs.1,00,000 has grown to Rs.6,72,000 at the end of 20 years as compared to Rs.3,00,000 using Simple Interest.

PLAN EARLY FOR RETIREMENT:

 You should have a retirement plan in advance, so that when you retire from work, you continue to maintain the same lifestyle without worrying about expenses and inflation. A retirement plan helps you to pursue your post-retirement dreams and to secure your future.

Some of your Retirement Planning tips:

  • Saving early for retirement gives money more to grow and compound. This ensures availability of a large lump sum on your retirement.
  • Make sure you save enough to cover unplanned expenses and emergencies. Ensure that you have adequate insurance policies to cover unforeseen events and medical emergencies to secure your family and lives ones.
  • It is desirable to diversify your investments across different asset class does not perform, you can get returns from other asset class. Put it simply, don't keep all your eggs in one basket.
  • Choose your plan keeping in mind your retirement goals and lifestyle.

For a secure Life and Retirement, one should must have Insurance Policy:

Insurance Provide you financial support if something unexpected happens to you and your family - such as an accident, medical emergency cost due to illness, fire or theft. Insurance provides a safety net that can help mitigate the financial impact of unexpected events or emergencies.

Key types of Insurance:

Life Insurance provides financial support to your dependent family members in case of your demise.

Disability Insurance provides income support if you meet with an accident that prevents you from carrying out your physical activities.

Health Insurance helps you to cover the medical and hospitalization cost due to illness or accident.

General Insurance pertains to car insurance, travel insurance, retirement insurance, property insurance etc.

Assess your need before you buy insurance. The type of insurance you need will depend on what you intend to protect in case something untoward happens t you such as your life, family, house, movable/immovable assets, etc. To buy insurance, you will be required to pay premium, which could be monthly, quarterly or yearly. Premium can also be one-time payout in case of certain type of insurance. These payments need to be part of our budgeting exercise.

Key Takeaways: 

  • Inflation is sure and permanent with the time.
  • To overcome inflation, you should invest your money wisely.
  • Compounding can be a great way to generate a good return.
  • Insurance is a safety net which allows you to live freely.





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