Inflation vs. Money: Why Saving Alone Is not Enough
Ever since the Covid-19 pandemic, there’s been a surge of new investors entering the stock market. While it's encouraging to see more people taking charge of their financial futures, many are understandably unsettled by the sharp ups and downs of equity investing.
But here’s a reality check: market corrections are normal. In fact, in 20 out of the past 23 years, the stock market has experienced a correction of 10% or more. This volatility is not a bug — it’s a feature of long-term wealth creation.
 |
| Money vs Inflation |
The real danger isn’t market swings — it’s inflation. Like a silent parasite, inflation steadily eats away your purchasing power, reducing what your money can buy year after year. Unlike market corrections, which often present buying opportunities, inflation offers no such benefit. It's a slow and invisible drain on your wealth.
Inflation - The Silent Killer
Recently, a software professional from Bangalore reached out to me through LinkedIn. He had a straightforward question:
"I want to build a corpus of ₹1 crore in the next 20 years. Can you guide me?"
I paused for a moment and replied,
“Do you realize that ₹1 crore today may be worth just ₹25 lakhs in 20 years?”
He was surprised.
“Why? I don’t understand the math behind that,” he said.
What he hadn’t factored in was inflation — the silent killer of wealth.
Inflation gradually reduces the value of money year after year. On average, prices in India increase by around 6% to 7% annually. That means the things you can buy for ₹1 crore today may cost ₹4 crore in the future in two decades.
Just think about it — there was a time when an egg cost ₹1; now it’s ₹10. That’s inflation at work.
And it’s even worse in certain sectors.
- In education, inflation is closer to 12% annually.
- In healthcare, costs are rising at a staggering 14% per year.
So if you're planning for long-term goals like retirement, your target corpus needs to account for the rising cost of living. A ₹1 crore goal today might need to be ₹4 crore or more in 20 years to give you the same lifestyle.
The Real Impact of Inflation
Let’s look at inflation from a practical angle.
If your monthly household expenses are ₹1 lakh today, they could rise to approximately ₹3.87 lakh per month in 20 years — assuming an average inflation rate of 7%. That’s nearly four times your current cost of living.
Now think about healthcare. A medical procedure that costs ₹10 lakh today might cost you ₹40 lakh or more two decades from now. In such a scenario, a ₹5 lakh health insurance policy that seems sufficient today could look completely inadequate in the future.
The same inflationary pressure applies to education. A college degree that costs ₹7 lakh now could require ₹28 lakh in 20 years — again, based on 7% annual inflation. And this is a conservative estimate. In reality, education and healthcare inflation often runs much higher — sometimes 12% to 14% per year.
So whether you're planning for your child’s higher education or your own retirement, inflating your target corpus by at least 7% annually is not optional — it’s essential.
The Mathematical Game of Inflation
Let’s understand how inflation silently eats away your wealth over time.
Even with a modest inflation rate of 7% per annum, the erosion is alarming.
Here’s what your ₹1 crore today will be worth in the future:
- ₹71.3 lakh in 5 years
- ₹50.75 lakh in 10 years
- ₹36.15 lakh in 15 years
- ₹25.84 lakh in 20 years
Yes, your ₹1 crore could lose nearly 75% of its value in just two decades!
How are these numbers calculated?
It’s based on a simple rule known as the “Rule of 72.”
Just divide 72 by the annual inflation rate — and you'll get the number of years it takes for your money’s purchasing power to reduce by half.
For example:
- At 7% inflation,
72 ÷ 7 = 10.28 years
This means in roughly 10 years, your money will only buy half of what it can buy today.
How Nominal Returns Can Mislead You
Many investors prefer to play it safe and settle for what seems like a “decent” return — say, 6% per annum. On the surface, it feels like a smart, low-risk strategy. But there’s a hidden trap: inflation.
Let’s break it down with a simple example.
Suppose you invest ₹1 crore today in a fixed-income instrument offering a 6% annual return for the next 20 years. By the end of that period, your investment will grow to approximately ₹3.2 crore.
 |
| Your Future Wealth Creation |
Sounds impressive, right?
But now, let’s account for inflation.
If inflation averages 7% per year, the purchasing power of that ₹3.2 crore shrinks dramatically. In real terms, it would be equivalent to just ₹2.6 crore — meaning ₹60 lakh of your hard-earned returns are silently eroded.
Here’s why this happens:
Real Rate of Return = Nominal Return – Inflation
Real Return = 6% – 7% = –1%
Yes, your real return is actually negative.
This means your money is growing on paper, but losing value in real life.
That’s why relying solely on nominal returns can be dangerously misleading.
When planning long-term goals like retirement or education, always focus on real returns — because that’s what truly matters for your future purchasing power.
How to Shield Your Investments from Inflation?
By now, you might be wondering:
"How do I protect my investments from the impact of inflation?"
The answer is simple — invest in assets that consistently beat inflation.
Take a look at this illustrative comparison:
| Instrument | Expected Returns (p.a.) | Real Returns (After Inflation @ 7%) |
|---|---|---|
| Savings Account | 3% – 4% | –3% to –4% |
| Fixed Deposits (FDs) | 6% | –1% |
| Gold / Silver | 9% | +2% |
| Real Estate | 7% – 9% | 0% to +2% |
| Equity Mutual Funds | 12% | +5% |
As you can see, equity is the only asset class that consistently beats inflation by a healthy margin.
While gold and real estate may also help, their margins are relatively narrow.
📌 Note: These figures are for educational purposes only. Always consult a qualified financial advisor before making any investment decisions.
Key Steps to Protect Your Wealth from Inflation
1. Diversify Your Assets
Even if you prefer to play it safe, avoid putting all your money into low-return instruments. A well-diversified portfolio helps manage risk and improve overall returns.
Example Allocation (General Suggestion):
- 70% in Fixed Income, Real Estate, or Gold
- 30% in Equity Mutual Funds or Stocks
This blend gives your portfolio the potential to grow and stay ahead of inflation over the long term.
2. Understand the Difference Between Saving and Investing
Saving keeps your money safe but doesn't grow it.
Instruments like savings accounts or FDs often offer 0% or negative real returns after inflation.
Investing, on the other hand, involves calculated risk with the goal of growth.
By investing in inflation-beating assets like equity, you allow your money to compound over time.
3. Review Your Portfolio Regularly
Don’t set and forget your investments.
Become an active investor — review your goals and portfolio periodically.
For example, if you're investing for a home down payment in 5 years, check if your current plan is on track or needs adjustments.
4. Work With a Financial Advisor
A financial advisor helps align your investments with your goals, lifestyle, and risk tolerance. They also help you adapt to changing market conditions and personal milestones.
Think of them as your financial GPS — keeping you on course when things get bumpy.
Final Takeaway: Inflation Is a Silent Wealth Killer
Inflation constantly erodes the value of your money. While your investments may or may not compound — inflation definitely will.
You might feel satisfied aiming for a ₹1 crore corpus in 20 years, but in reality, a large portion of that amount could be eaten away by inflation if not planned properly.
So ask yourself:
Do you consider inflation when planning your investment goals?
P.S. I help investors build wealth confidently and strategically by planning investments that beat inflation.
📩 Feel free to drop me a message if you need guidance on your financial journey.
Frequently Asked Questions (FAQs)
Why should you worry about inflation even if you’re saving or investing?
Because inflation quietly reduces your money’s purchasing power over time. Even if you're saving or investing, your wealth may not actually grow if your returns don't outpace inflation.
What is the real rate of return, and how does it affect your investments?
Your real rate of return is the actual growth of your money after adjusting for inflation.
🧮 Real Return = Nominal Return – Inflation
So, if you earn 6% on an FD and inflation is 7%, your real return is –1%, which means you’re actually losing value.
Is it safe for you to rely on Fixed Deposits (FDs) for long-term goals?
FDs feel safe, but over the long run, they often fail to beat inflation. That means your money might grow on paper but lose value in reality.
Which investment options can help you beat inflation?
If you want to stay ahead of inflation, consider equity mutual funds. Gold and real estate can also help, but their returns are usually lower compared to equity over the long term.
How much of your portfolio should be in equity to stay ahead of inflation?
While it depends on your risk appetite and goals, even if you’re conservative, keeping at least 25–30% in equity can help your portfolio beat inflation.
Can gold really protect your wealth from inflation?
Yes, gold is a good hedge against inflation. But instead of relying on it entirely, you should use it as part of a well-diversified portfolio.
How can you use the Rule of 72 to understand inflation?
Use the Rule of 72 to estimate how fast inflation will reduce your money’s value.
🧮 72 ÷ Inflation Rate = Years to lose half your purchasing power
At 7% inflation, your money’s value halves in just about 10 years.
Should you stop saving and invest everything instead?
Not at all. You need both savings and investments. Savings help with short-term needs, while investments — especially in inflation-beating assets — are essential for long-term growth.
How often should you review your investment portfolio?
You should review your portfolio at least once or twice a year, or anytime you have a major life change. This keeps your investments aligned with your goals and inflation trends.
Do you really need a financial advisor to plan for inflation?
If you’re unsure how to invest smartly or don’t have the time to manage your portfolio
No comments: