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Why Your Money Feels Less Valuable Every Year – The Evil You Call Inflation





 Have you once gone shopping with your thousand bucks and felt like your money is vanishing right after paying a bill?


You went to the market, bought a few things, had a meal somewhere, or availed services worth a substantial amount! But then you realized that your money is gone faster than you anticipated! Something similar must have happened to you a couple of years back; you would have got double the items for ₹1,000.


What is it that makes our money shrink after a certain period? One of the biggest culprits is inflation. Inflation is something that we hear about quite often but do not fully understand! It is something that we realize the effect of when our vegetables’ price goes up, our favourite dish becomes expensive, or when our travel budget increases!


It may also affect your savings, salary, or investments. Therefore, it is essential to know what inflation is, why it occurs, and how an average guy can tackle it!


Let us begin by understanding what inflation is!


What Is Inflation?


Inflation, in simple words, is the gradual increase in the price of goods and services that occur over time. You might already observe inflation in the form of daily expenses such as transport, food, eating out, studying, or a lot of other goods and services that you purchase for a living.


Consider this example, if you were to get ₹1,000 today, you might be able to get a number of goods and services with that much money. However, after several years, if you were to use the same ₹1,000, it may not be sufficient to buy the same amount of goods and services as you were able to buy previously because of inflation.


It is essential to keep an eye on inflation to save money wisely, especially if you plan to save up for something you want to achieve in the distant future.


What is Purchasing Power?


Purchasing power refers to how much you can buy with your hard-earned money. In the example above, ₹600 has less purchasing power than it used to have!


Why Are Prices Rising 


Have you ever wondered why the prices of the same goods cannot stay the same for an extended period of time?


There are several reasons for this, and it would be unfair to say that there is a definite answer.


A company that is engaged in the production and sale of goods has many expenses that directly affect the price of the product.


Therefore, if, for example, the price of raw materials or electricity rises, the costs of production and, accordingly, the prices of the goods will also increase.


Another reason is the changing supply and demand – if the demand for a particular product rises while the supply of it decreases, prices rise.


For example, a shortage of a particular vegetable due to cold weather prolongs its harvesting period and increases its price.


In addition, political events in different parts of the world and changes in the supply of resources affect prices.


The price of goods and services in one country is influenced by the situation in other countries in terms of trade, exchange rates, fuel prices, and much more.


Thus, inflation is affected simultaneously by a few factors and cannot be called a result of only one particular cause.


Therefore, we as consumers must understand that prices are not fixed and change constantly and, based on this information, plan our expenses wisely.



How Will Inflation Affect My Everyday Life?


Inflation does not need to be studied at an academic level to be understood! You already realize its impact on your day-to-day life. The next time you go through your monthly expenses and realize that your electricity bill, transportation costs, or restaurant visits are costing you more than before, you will have an understanding of how inflation impacts your life.


If you are a wage earner, you may realize that your salary has not increased at the same rate as your monthly expenditures! Inflation can also eat into your savings, and this is why it is essential to have a clear view of your finances!


How Inflation Impacts Your Savings


Let us suppose that you have saved up ₹1,00,000. You look at your savings account and feel reassured that ₹1,00,000 is secure. But then, after five or six years, you realize that you cannot purchase as many things as you could before with your ₹1,00,000!


That is why it is crucial to understand the concept of inflation and invest your hard-earned money wisely!


Do Not Mistake Saving for Investing


Saving and investing are two different things! Saving is usually done for the short term, while investing is for the long run. Therefore, it is essential to have a separate emergency corpus and invest the rest of your money in a reliable asset that will help it grow without risking your short-term expenses.


Moreover, it is necessary to understand what you are doing before you invest your hard-earned money. Do not get persuaded that this or that scheme is the best! It is always important to do your research before deciding to make any financial commitment.


Lifestyle Inflation


Your income has increased, so you decide to increase your lifestyle as well. Instead of saving the extra amount you earned, you begin to order more food, spend on more expensive items, upgrade your gadgets and electronics, and splurge on entertainment! But this has not really benefited you!


Lifestyle inflation is different from the economic inflation we discussed above! However, both of them can have adverse effects on your finances if you are not aware!


It is always important to keep track of what you spend your money on!


A Simple Illustration That Explains Inflation


Imagine you keep ₹1,000 in your cupboard or under your bed for a specific period! After ten years, you take out this ₹1,000, and you feel happy that you still have it with you! But, the question you must ask yourself is:


What will this ₹1,000 buy for me now?


It may not buy you as many things as it did ten years ago because of inflation!


Things You Can Do To Beat Inflation


1. Save your emergency fund


Any unpredictable expense that can arise anytime, such as hospital bills, car repair, job loss, etc., can turn out to be expensive. To counter such unanticipated expenses, it is essential to have an emergency fund

Therefore, it is imperative to save some money for emergency needs. The emergency fund should be created based on one's income and expenses. One can start by saving a smaller amount and increase the amount if required.

Having said that, an emergency fund must not be used for investment purposes, as the sole aim is to have access to funds in times of dire need.


2. Do Not Keep Your Money Idle


This is particularly applicable to the amount you keep aside for long-term financial goals. If you do not invest or grow this money, it will not serve its purpose when you need it the most!


Therefore, it is essential to learn about long-term investment options and educate yourself before you do anything.


3. Increase Your Income


The best way to prepare yourself against inflation is to increase your earning potential! Therefore, it is essential to improve your skills and knowledge while also exploring other avenues to increase your income.


The Truth About Inflation – Know It and Do Not Be Afraid of It


It may seem confusing when you read about inflation in economics books. But, the main point to remember is that whenever prices of goods and services increase, the purchasing power of your money decreases.


Once you understand this simple concept, you will have a clear idea about a lot of things! You will realize why people keep an emergency fund. You will also know why people keep their long-term money in investment instruments instead of keeping it in a locker.


Moreover, you will also understand why your salary or investment returns are not enough to keep up with your expenses or meet your financial goals. You will also realize why it is essential to increase your income and why it is necessary to think before you spend your hard-earned money!


Summary

Inflation is a part of life. Therefore, it is essential to understand how your money works instead of worrying about how much money you possess! The ₹1,000 you have today will not be as valuable as it is now after a couple of years!


The dream house or car you want to buy after five years will not cost you the same amount either! Therefore, remember that inflation may adversely impact your future financial goals!


But, it is always crucial to remember that you do not need to become an economist to handle inflation! It is essential to have an understanding of how money works. It is essential to know why you need an emergency fund, why saving and investing are different, why it is always necessary to have financial goals, and why you should never put your hard-earned money in the wrong place!


You do not need to master every concept regarding personal finance right away. It is essential to understand a few basic concepts and take baby steps towards securing and growing your finances! And when you do this, you will no longer be afraid of inflation!

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