Inflation-How Does It Impact Your Savings?

For last 2-3 years, we all have been dealing with high Inflation. The enormous rise in our household budgets due to rise in prices of essential items, education costs, loan EMIs etc. have  forced to re-look at our finances and cut down on expenses to survive the situation. Although a mild Inflation is always good for economy, but when it rises very high (almost out of control), it jeopardize the savings as the currency of the country gets impacted.

Impact on Savings

Comfortable Retirement, Children’s future Planning, Buying a house, car etc. are concerns around which the life of a common man revolves. These goals form the major portion of one’s expense in their budget. As the priorities changes, the ratio of a particular expense too changes.  For e.g in the initial years self- expense is high while in later years of life, children education expense takes up more in the budget. Inflation impacts all these goals adversely. The amount of savings one need to do to meet these goals is heavily dependent on the amount of funds required for respective goals. If inflation is high, the need of funds will keep on compounding with the required number. This increases the amount of savings required and sometimes go out of reach if delayed due to various reasons.

Given below is an illustration reflecting the rise in corpus required due to inflation:

 As can be seen the household expense of Rs. 4 lakh will increase to Rs 1547874 after 20 years. Similarly, the Education cost of Rs 10 lakh today will increase to approx. Rs 67 lakh after 20 years. Sometimes, the higher increase restricts the amount of savings you can do as income does not increase at the same rate. Hence a longer time horizon is required to reach the inflated figures with fewer amounts of savings.

The impact is more when you are running huge liabilities. Home loan, car Loan etc. reduces your capacity to save. Any increase in these liabilities along with inflation gives a double blow to your savings. Hence in most cases the planning for important life goals get delayed. And when it starts the savings required reaches astonishing figures.

 Clearly, the savings required keeps on increasing as you delay the financial goals.

Impact on Returns

The returns you earn on any investments also get impacted by Inflation.  The net return earned on investments can be quite low when it is considered. For e.g. if a fixed deposit is offering interest rate of 7% and inflation is 6% the return you earn is only 1%. Add with taxability of this return, you might be losing money instead of earning anything. Hence, inflation eat out returns earn on investments which impact your goal achievement.

Inflation will always be there. We cannot live without it. The only way to tackle is planning ahead. Consider inflation while planning all your future expenses.  When investing for your goals aim for inflation-adjusted returns. Early planning can help in meeting desired financial objectives with your available resources.

As published in Dainik Bhaskar