The Impact of Inflation on Personal Wealth and How to Combat It
Inflation is a silent thief that can erode your wealth over time. Inflation is a measure of the increase in the general price level of goods and services in an economy over a period of time. In India, inflation has been a persistent problem over the years, with the average inflation rate hovering around 5% in recent years (Reserve Bank of India, 2021).
The impact of inflation on personal wealth is significant, as it reduces the purchasing power of money. This means that the same amount of money you have today will buy you fewer goods and services in the future. For example, if the inflation rate is 5%, the purchasing power of your money will decrease by 5% every year, which can significantly impact your wealth over time. Thus, it is important your investments generate higher return than rate of inflation, i.e a positive real rate of return.
To understand the impact of inflation on personal wealth, consider the following example: If you have ₹100,000 today, and the inflation rate is 5% per year, after 10 years, your money will only be worth ₹71,157 in today's terms (Calculator.net, 2021). This highlights the importance of taking steps to combat the impact of inflation on your wealth.
So, how can you combat the impact of inflation on your wealth? Here are some strategies to consider:
1. Invest in Stocks or Equity Mutual Funds: Investing in stocks or equity-oriented mutual fund schemes can be a great way to combat inflation, as the stock market has historically provided a higher rate of return than inflation (Economic Times, 2021). Investing in a diversified portfolio of stocks can help you achieve higher returns and protect your wealth against inflation.
2. Invest in real estate: Real estate is another option to help combat inflation. Property values tend to rise over time, which can help you keep pace with inflation and protect your wealth.
3. Invest in bonds: Bonds are debt securities that pay a fixed interest rate over a set period. Investing in bonds can provide you with a steady income stream and help you combat the impact of inflation. Though they may not provide significant real rate of return are less preferred to equity investments as a hedge to inflation.
4. Diversify your portfolio: Diversifying your portfolio by investing in a mix of stocks, bonds, real estate, and other investment options can help you better balance risk and reward and protect your wealth against inflation.
5. Start saving early: The earlier you start saving, the more time your money has to grow and compound. By starting to save early, you can take advantage of the power of compounding and build your wealth over time.
6. Review your investments regularly: Regularly reviewing your assets can help you make informed decisions and adjust your portfolio as needed to protect your wealth against inflation.
In conclusion, inflation can significantly impact personal wealth, reducing the purchasing power of money over time. To combat the impact of inflation, investing in a diversified portfolio of stocks, bonds, real estate, and other investment options is essential; start saving early, and review your investments regularly. By taking these steps, you can protect your wealth and achieve your financial goals.
References:
· Calculator.net. (2021). Inflation Calculator. Retrieved from https://www.calculator.net/inflation-calculator.html
· Economic Times. (2021). How Stocks Help Combat Inflation. Retrieved from https://economictimes.indiatimes.com/wealth/invest/how-stocks-help-combat-inflation/articleshow/78194970.cms
· Reserve Bank of India. (2021). Inflation. Retrieved from https://rbi.org.in/Scripts/BS_ViewGov