Inflation- What it is? How it decreases purchasing power of money? (Telugu)
These days you may have heard about inflation in Media. In this article, I will explain how it decreases the purchasing power of money.
What is Inflation?
For example, you have vacant land in your city. There is a large number of people are willing to buy your land. Then the price of the land will increase significantly.
The increase in the price of goods and services is called Inflation. Example your real estate price increase because of this only.
What is Deflation?
If is just reverse to Inflation. If there are no one or very few buyers are willing to buy your land then the price of the land will decrease.
Deflation means the decrease in prices of goods and services.
Deflation is just opposite to Inflation.
How Inflation decreases Purchasing Power of money?
You may have noticed the cost of 1-liter milk in your childhood is different now. The price of 1-liter milk is a lot higher than earlier.
Those day people income is different from now. The rise in the price of 1-liter milk is simply called as Inflation.
While planning your financial goals like retirement, child higher education, and house purchase etc. You should always consider its effect.
Others wise you may end up falling short of achieving these financial goals. According to inflation only you should plan your investment.
Let us take an example to understand it better. If You want to plan your 3-year-old child higher education which is 15 years away.
The cost child higher education in today’s cost is 10 lakh. You have 10 lakh rupees in your hand.
You have invested in Bank Fixed deposit which is giving 7% interest and you are feeling that you have secured your child higher education.
But it is not true. Reason for this is because in India Inflation for Higher Education is around is 10%.
That means the cost Child Higher Education after 15 years will be Rs.41,27,448.
At the same time, your investment value in Bank Fixed Deposit will Rs.27,59,032.
“If you notice carefully, the cost of higher education and the money available today are same. But after 15 years the cost of higher education much higher than the funds available in hand”.
That means There is shortfall to the corpus required for child higher education for Rs.14,00,000.
Hence If you do not plan your investments well Inflation slowly eats away your money and chances of achieving important financial goals
in your life becomes tougher.
Plan Your Investments with inflation in Mind
There is a formula to calculate the real return that you are getting from your investments.
Real rate of return = (1+return)/(1+inflation)-1)*100.
If you enter the values in the formula, Positive value means that your investments are doing well in beating inflation.
Negative means your purchasing power is decreasing.
I hope you like this simple about inflation and you will plan your investment from now in a better manner.
Watch youtube video about inflation.
Also, read the article about Investment- What is in your hand?. Click here to read.
Also, read the article about Own house cost that you can afford(Telugu). click here to read.