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Why you should not take inflation lightly, what to do about it, step by step

Sep 15 2013, 21:38 IST
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We cut through the hype and provide to you the power to raise your purchasing power. (AP) We cut through the hype and provide to you the power to raise your purchasing power. (AP)
SummaryWe cut through the hype and provide to you the power to raise your purchasing power.

Inflation has been a spoil-sport for years now. The news coverage has painted many a doomsday picture (current account deficit {CAD}, high interest rates, crashing GDP growth) involving the Indian economy. We look to cut through the hype and focus on you and what you can do about it.

Letís say you can purchase one kilogram of rice with Rs. 50 today. Ten years ago, you could have purchased 2 kilograms of the same quality of rice with Rs. 50. And ten years hence, you will probably have to shell out Rs. 75 for one kilogram of the same quality of rice. This means your power to purchase something for a particular amount reduces going forward. This reduction in your purchasing power is due to the increase in the price level 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 level of goods and services increases, then your purchasing power falls. So, when you talk of income, you must consider your Ďreal incomeí, which is adjusted for the inflation factor.

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 the time you are 55. You expect to live till you are 80 years old. You spend Rs. 70,000 monthly at present. If you wish to maintain the same lifestyle post retirement also, how much corpus will you need at the time of retirement? Assuming inflation in expenses at 7% per annum both pre and post retirement and an 8% return on your investments post retirement, you will need a retirement corpus of Rs. 8.07 crores to help you meet your expenses till you are 80 years old. If inflation is lower at 6% per annum, this amount falls to Rs. 5.96 crores, a huge difference of Rs. 2.11 crores. This is the huge part played by inflation on your retirement planning.

Scenario 2 - Goal Planning: Now assume you have a 10 year old daughter. You wish to send your daughter abroad for her post-graduate education, 11 years from now, when she

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