Taking inflation in your stride

Image courtesy Hindu

 

Having done various back-of-the-envelope calculations, you must have arrived at a savings target for your child. After adding in a buffer, you must be satisfied about the figure you have calculated and have perhaps started saving to reach your target.

But hold on! Are your calculations on the spot? Have you calculated the invisible ever looming cost for all investors – Inflation?

 

Inflation hits just about anything one need to live on — rice, vegetables, clothing, fuel, medicine and doctors’ fees and most especially the cost of education.

 

A simple example to understand inflation is that when a small child takes 3 steps forward and two backward, he has crossed the distance of just one step.

Similarly if your savings are earning you 12% p.a. but the inflation is raging at 10% p.a then your net savings are growing at only 2% p.a.

 

To look at this by zooming into the future, if your genius 8-year-old child’s medical education costs Rs 5 lacs now, by the time he is eighteen it will cost Rs. 10,79,462/- at a moderate 8% p.a. inflation rate. That is more than double of the current cost of education.

The inflation will lessen the current value of your money hence to beat inflation:

  • While choosing  an investment make sure that the return is more than the inflation rate.
  • When planning long-term savings, remember that the cost of living will go up by the time you reach the goal.  So set the goals for the child’s saving plan accordingly.
  • To help make sure inflation does not eat into your savings, you could increase any amounts you regularly put away by a percentage that at least matches the inflation rate. When they’re added to the total sum, compound interest will further contribute its earning magic.

 

 Article written for Fidelity Investments

 

 

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