Savings is synonymous with putting money aside in our “piggy bank.” While we all love the idea of having a bag full of cash, it has one major drawback - it loses its value over time. How? The answer is “Inflation”.
Inflation refers to the increase in price levels of goods and services within a country. This price increase reduces the purchasing power of its currency. For example, one McDonald’s McAloo Tikki burger used to cost Rs 20, back in 2005. Thanks to inflation over the years, the same burger now costs Rs 49. In the same way, a 100 rupee note is worth more today than it will be tomorrow or even one year in the future. The rate of inflation has increased from 4.25% in 2005 to 5.03% in 2020, which may not seem a lot but makes a huge difference to the prices of many goods and commodities.
Now does having all our savings in cash seem like a good idea? No. Inflation erodes the value of cash. To beat inflation and grow our money, we need to make investments that protect against the rising price levels. Gold is a classic example of an asset that provides a hedge against inflation. Investment in real estate, stocks, bonds are some of the other ways to protect our cash from inflation.
But we mustn’t get ahead of ourselves! Investing all our money at one go is not a prudent decision. We need to keep some cash handy for our day to day needs as well as any emergencies.
Investing prudently can sometimes be like driving a car. If you’re driving the car at high speed, there are increased chances of accidents. But if you’re going too slow, this can also lead to accidents. Investing ALL our money is equal to driving the car too fast, you may see a sharp increase in value, but it could lead to accidents. Similarly, keeping all money in cash is like driving a car too slowly. It does not add any value to current wealth, on the contrary, it will erode our wealth over time. A balance between the two is the best way to go.
Concept: Shivangi Bhatia Editor: Minakshi Agrawal Todi