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Inflation & You

By   /   January 24, 2013  /   3 Comments

inflation

 

The most common definition of inflation is increase in prices of goods & services over a period of time. Trust me we are not here to understand the definition of inflation. Let’s see how inflation affects our life & should we really care about it.

 

What is Inflation for you !!!!

Say today you go to market & purchase 1 kg of mangoes for Rs.100. A year after you go to the market to purchase 1 kg of mangoes & the salesman asks for Rs.108, that’s inflation for you. In percentage terms it comes out to be (108 – 100 ) / 100 = 8%.

Average inflation in India for the past 10 years (1st Jan 2003-31st Dec 2012) is about 6% per annum. The situation is more ALARMING in the past few years. Over the past five years (1st Jan 2008 to 31st December 2012) inflation rate in India is about 7.8 %. In simple words it means that if you purchased say a product ‘A’ in 2008 for Rs.100, you have to pay approxRs.145 (100*1.078^5) to buy the same product in the year 2012. Ask yourself a Simple Question !!!!  Did your income increased at the same rate!!!!….

 

How Inflation effect’s you !!!….

Say you invested Rs.1,00,000 in a bank fixed deposit for a year @ 9% annual rate of interest. Amount after a year will be Rs.1,09,000. So profit is Rs.9,000 !!! HOLD ON, how can you forget TAX. The actual amount you will receive after a year after deduction of tax will be as follows:

TAX BRACKET BEFORE TAX AFTER TAX ACTUAL RATE OF RETURN
10 % 9,000 (9,000 – 9,000*10%) = 8,100 8.1 %
20 % 9,000 (9,000 – 9,000*20%) = 7,200 7. 2 %
30 % 9,000 (9,000 – 9,000*30%) = 6,300 6.3 %

 

CATCH: In the current scenario inflation rate is close to 8% & if you are among those who fall in 20% tax bracket, actual rate of return you earn from depositing your money in bank FD is 7.2%. Here in fact Inflation is Silently eating away at you savings (7.2 – 8 = -0.8%). Your after tax return should be at least 8% 🙁 or more 🙂

 

Different inflation for different products & services !!!!….

Cost of vegetables a year after may increase at a less faster rate as compared to the cost of fruits or vice versa. If your aim is to save money for higher education of your kids, you need to consider around 10% rate of inflation.

An example will better help you understand the impact of inflation on higher education. In the year 2003 when I took admission in engineering ( yup 🙂 I am an engineer ) tuition fee for one year was Rs.38,000. When my brother Harsh took admission in engineering course in the year 2012, fee for one year was Rs.1,00,000. That’s comes out to be 10% increment compounded annually.

 

“For long we have been hearing from our parents and grandparents that  saving money is equally important as earning money. In the current scenario where inflation is high the new definition is saving money ‘ sensibly’ is equally important as earning money”.

 

www.financialkundali.com

www.financialkundali.com

 

Recommended Articles for you:

1. Education Loan – Tax Benefits

2. Save Tax on School / College fees of your kids

 

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About the author

Hi My name is Hari Om Tripathi. I am an engineer by chance & a Personal Financial Planner by choice. Currently residing in Kanpur & writing full time for Financial Kundali. In case you have any query about Personal Financial Planning such a buying a MF or ULIP, going for a life insurance plan or a term plan, to surrender your policy or not or any other questions related to your Personal Financial Planning, write to me at financialkundali@gmail.com

3 Comments

  1. Abhishek says:

    good to read article,
    one must consider the impact of inflation on returns while investing.

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