What is inflation all about?

Inflation is something that eats into the money that you have saved. There are a lot of people who do not know anything about inflation. They just know that the prices of the essential things are all rising. So, the result is that the person who was earning a particular sum of money is not able to afford the same things that he was able to afford in the past, though there has not been a change in the income earned by the person. The reason for this is the inflation.

Inflation, Schlange vor Lebensmittelgeschäft, Berlin

Every single person who is saving money should ensure that the money that is saved is able to beat the inflation in the country. There are some countries in the world that have a very high inflation. There are other countries in the world that will not have a high inflation. In fact, there are a very few countries in the world where the inflation is negative. There are different conclusions that one can draw from these different rates of inflations present in various countries.

  1. Investments that are made should beat inflation: The investments that you make today in various financial instruments will give you a rate of return. The rate of return should be more than the rate of inflation that is prevalent in the country at the time. For example, if you are investing in a financial instrument that provides you a return of 8% and if the inflation that is prevalent in the economy at that time is about 9%, then the amount that you get in return after the period of investment will have a lesser value. This return on investment that has a lesser value is called as negative return, when adjusted for inflation. On the other hand, if the investment earns a rate of about 8% and if the inflation is about 5%. Then you will be able to get a return on your investment of about 3%, when it is adjusted for inflation.
  2. Retirement planning should be based on inflation: The planning for the retirement is something that you will have to think and plan too. Each and every person should start planning for their retirement even when they start their career. This is because of the fact that it is not easy to plan and invest just in the few months before the retirement. So, when you plan for the retirement, you need to ensure that you invest in instruments that will give you a return that is much more than the inflation, over a period of time. You should not think about the short term inflation, but you should think of the long term inflation that could eat away into the money that you have saved. In spite of saving so much money, you will end up not having a lot of money at the time of your retirement.

So, it is very important that you try and plan for the inflation adjusted returns on your investments. This will help you to get enough money after the period of investment.

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