Investors frequently overlook the impact of inflation on savings while planning their financial portfolio. Unfortunately, inflation is a thief that eats away at your funds and diminishes the returns on your assets. As a result, it is critical to understand inflation, its impact, and how to utilize an inflation calculator to manage your investments properly.
What is Inflation?
Inflation is defined as an increase in the costs of goods and services in an economy. People have to shell out more money when prices rise to buy the same commodities. As a result of inflation, the purchasing power of the rupee falls, leading to an increase in the cost of living.
In India, two major baskets of commodities and services are used to measure inflation. The two indices are:
- Consumer Price Index (CPI)
- Wholesale Price Index (WPI)
How Does Impact Savings?
The primary purpose of investing is to provide for future financial requirements. However, every increase in the price of products and services cuts into your savings. The reason being the amount of money you may save will not be sufficient in future due to inflation. Thus, inflation has two adverse effects on your savings:
- decreases buying power
- increases your future financial requirements
The formula to calculate the inflation rate is given below:
You can measure the inflation using Consumer Price Index.
Inflation rate = (Current period CPI − Prior period CPI)/Prior period CPI
You may also use an inflation calculator to compute the numbers quickly.
What is an Inflation Calculator?
An inflation calculator is an online tool that allows you to calculate the future worth of money depending on the inflation rate. In other words, a calculator assists in predicting the future value of a particular amount of money after a set period. You may also use a calculator to assess the true worth of your investments after adjusting for inflation.
How Can an Inflation Calculator Help You Make Better Investment Decisions?
Using an inflation calculator can assist you in determining the future worth of your assets. Indeed, we all want our assets to grow and help us maintain or improve our spending power. But unfortunately, negative returns occur when we invest in savings with returns that are lower than the predicted rate of inflation. As a result, you’re actually losing money on such investments.
For example, suppose you invest Rs. 1000 in an FD with a set interest rate of 5% for a year. Inflation, on the other hand, is 5.5 per cent for the year. As a result, you receive negative annual returns.
Thus, it is crucial to invest in inflation-beating returns to achieve financial goals. One efficient approach is to invest in equities or mutual funds.
Different mutual fund schemes have a track record of outperforming inflation over time. Therefore, depending on your time horizon and risk tolerance, you may add multiple mutual fund schemes to your portfolio to assist produce a substantial corpus after adjusting for inflation.
You’re undoubtedly in danger if your investment returns aren’t equal to or better than the inflation rate. Your investment returns should be substantial to compensate for the loss caused by inflation. A strong investing strategy will allow you to reduce the impact of inflation on your future savings.