Savings and investing are important components of personal finance management. Saving is all about keeping aside a portion of your income for future use. Investing is purchasing assets with the hope of earning returns over time. However, inflation, a general rise in the prices of goods and services over time, can influence your savings and investment goals. It reduces the purchasing power of currencies and lowers the value of the same amount of money over time.

From the groceries you purchase to the cost of tuition for higher education, inflation impacts every aspect of people’s lives. It can force people to reduce expenses, make retirement planning more difficult, make it harder for businesses to attract investors, and even lead to economic instability. Let’s understand how inflation affects your savings and investments and the steps you can take to mitigate its effects.

Example of the impact of inflation on investments

In terms of investments, inflation can also impact your returns. For example, if you invest Rs. 50,000 in a mutual fund scheme that offers a 10% annual return rate, you will earn Rs. 5,000 after a year. However, if the inflation rate is 6%, you would need Rs. 53,000 to maintain the same purchasing power. So, your actual return is only Rs. 2,000.

The central bank often raises interest rates to combat inflation. When interest rates rise, it makes borrowing money more expensive for companies. As borrowing costs increase, companies may find investing in growth and expansion difficult. This reduction in investment can lead to lower profitability and declining stock prices.

To mitigate the impact of inflation on investments, most experts recommend investing in assets that offer returns above the inflation rate. This can help you protect your wealth and maintain your purchasing power. However, high-return investments come with higher risks. So, you should assess your risk appetite before investing.

Example of the impact of inflation on savings

Let’s assume your savings account interest rate is 4% with a balance of Rs. 2,00,000. By inputting these figures into a savings account calculator online, you will know that your balance will grow to Rs. 2,08,000 after one year. However, if inflation over that same year is 5%, you would need Rs. 2,10,000 to purchase the same goods and services as before. So, even though you have earned interest, the increase in prices will reduce the overall value of your savings.

Therefore, it is important to consider inflation before you open a bank account online or through a physical branch. Look for interest rates that beat inflation to ensure your savings are not losing value over time. Also, check features of savings accounts such as low fees, ATM facilities, easy access to your money, and other benefits.

To conclude

Inflation impacts the value of money over time and affects the purchasing power of your savings and investments. So, consider inflation when planning for the future to ensure that your financial goals and plans remain relevant and sufficient.

You can also consult a financial advisor and use an inflation calculator to understand how much you should invest to beat the inflation and map out a long-term strategy. This way, you can take the right steps to keep your savings and investments valuable and achieve your long-term objectives.