The impact of inflation is such that a movie ticket which was 250 Rupees in 2005 is now 500 Rupees. Whether it is the price of a movie ticket or a house or simply a semester in college tends to get more expensive due to inflation. Here in this blog, Avaneesh Parasar explains how inflation affects your savings and impacts your personal savings plan.
What is Inflation?
Inflation happens when the average prices in the entire country go up or become more expensive. To put it simply the buying power of an individual goes down or decreases when the price of everything else goes up or becomes expensive. According to Avaneesh Parasar, the rate of inflation can swing in any direction – either go up or down, depending on the state of the economy.
How does inflation shrink your savings?
Inflation has a major impact on your overall savings. Inflation reduces the value of your savings because prices tend to go up in the future. This aspect is more noticeable when it comes to cash. An example of this is, when you keep money in the bank, you earn interest on it. This may balance out some of the effects of inflation. However, Avaneesh Parasar says that when inflation is high, banks pay higher interest rates. But the catch here is. That your savings may not grow at a fast rate to completely offset the loss done due to inflation.
How does it impact investments? (Avaneesh Parasar)
The type of investment you have made will depend on how inflation will affect it. For those investments which have a set annual return, such as the likes of regular bonds or even bank certificates of deposit, inflation can hurt its performance. Avaneesh Parasar says that since you earn the same interest payment each year, it can slice into your savings or cut them short. An example of this would be if you receive a payment of 1000 INR per year. That payment would become less and less with each coming year due to inflation.
When it comes to stocks, inflation has a mixed impact on them. This is because inflation is high when the economy is weak. Even though companies may be selling more, this is just to help their share price. However, it is important to keep in mind that companies will pay more for wages and raw materials – this hurts their total value. The truth of the matter is, that whether inflation will hurt or help a stock depends completely on the performance of the company behind it. Another aspect of inflation is that precious metals such as Gold always do well (have done so historically also) when inflation is high.
Finally, there are also some investments that are indexed for inflation risk. As per Avaneesh Parasar, they earn more when inflation goes up and less when inflation goes down.
These were some important insights into how inflation affects your savings and may impact your investments as well. It is important to know these features so that you can invest wisely and prepare for a rainy day.