Earning faster than the rate of inflation
The reduction in the purchasing power of money is due to the increase in prices of goods and services. This increase in price levels is termed as inflation. Now, if your income remains the same over the years but the price of goods and services increases, then your purchasing power falls. So, when you talk of income, you must consider your ‘real income’, which is inflation adjusted.
Remember that inflation always erodes the purchasing power of money. Hence it is very critical to account for inflation when you draw up your financial plan. In fact, inflation is the single most important factor to be considered when you plan for the future. Consider the following scenarios:
Scenario 1
Retirement Planning: You are 35 years old and wish to retire by 55. You expect to live till you are 80. You spend Rs 70,000 monthly at present. If you wish to maintain the same lifestyle after retirement, how much corpus will you need at the time of retirement? Assuming inflation in expenses at 7 per cent per annum both pre- and post-retirement and an 8 per cent return on your investments post retirement, you will need a corpus of Rs 8.07 crore to help you meet your expenses till you are 80 years old. If inflation is lower at 6 per cent per annum, this amount falls to Rs 5.96 crore, a huge difference of Rs 2.11 crore. This is the huge part played by inflation on your retirement planning.
Scenario 2
Goal Planning: Now, assume
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