Calculate the impact of inflation on money value
Inflation is the rate at which prices increase over time, reducing money's purchasing power. At 6% inflation, ₹100 today will buy only ₹94 worth of goods next year. Over 20 years at 6%, ₹1 lakh becomes worth only ₹31,180 in today's terms.
India's average inflation has been 5-7% historically, with recent years seeing 4-6%. CPI (Consumer Price Index) inflation measures household expenses, while WPI measures wholesale prices. RBI targets 4% inflation with ±2% tolerance band.
If your returns don't beat inflation, you're losing money in real terms. At 6% inflation, a 5% FD actually loses 1% purchasing power yearly. Aim for returns of inflation + 2-3% minimum. Equity historically beats inflation over long periods.
Nominal return is the stated return on investment. Real return = Nominal return - Inflation rate. A 10% FD return with 6% inflation gives 4% real return. Always consider real returns when evaluating investments for long-term goals.
Invest in inflation-beating assets: equity mutual funds (10-12% historical returns), real estate, gold (hedges currency depreciation), inflation-indexed bonds. Avoid keeping large amounts in savings accounts—keep only 3-6 months expenses as emergency fund.
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