As the economy continues to evolve, the inflation rate continues to affect the financial well-being of every individual. According to government data released on Monday (August 14, 2023), retail inflation soared to 7.44% in July, mainly due to a spike in food prices. In contrast, the money in your Savings Account earns approximately 6 – 7.5% interest. This clearly shows that you’re reducing your purchasing power if you don’t have a proper investment strategy.
In this article, Multipl will discuss the impact of inflation on your savings and offer insights
into how you can protect and grow your wealth in an inflationary environment.
Growth in the economy naturally leads to inflation. In India, factors like increasing consumer demand, rising production costs, and changing global economic conditions contribute to inflation. Over the years, India has experienced varying inflation levels, with the Consumer Price Index (CPI) being the commonly used metric to measure inflation.
It’s important to note that inflation isn’t always a bad thing. Mild inflation is generally considered healthy for an economy, as it indicates economic growth and increased consumer spending. However, high or hyperinflation, which leads to rapid price increases, can erode purchasing power and disrupt the stability of the economy.
The Impact of Inflation on Your Savings
Imagine you have set aside a certain amount of money for a specific goal, such as buying a home, funding your child’s education, or retiring comfortably. While the nominal value of your savings might remain the same, the real value—the purchasing power of that money—can erode due to inflation.
Let’s say you have saved ₹1,00,000 for a down payment on a home, and the current inflation rate is 5%. If inflation continues at this rate for a year, the cost of the home might increase by 5%. This means that your ₹1,00,000 might only have the purchasing power of ₹95,000 in terms of the increased cost of the home.
Over time, the impact of inflation becomes more pronounced, making it imperative to account for inflation in your financial planning.
Strategies to Mitigate the Impact of Inflation
While you can’t control the fluctuations in inflation rates, you can adopt strategies to mitigate its impact on your future savings:
Investing your money is one of the best ways to combat inflation. Instead of letting your savings sit idle, consider investing in mutual funds that tend to outpace inflation over time. Mutual funds have historically provided returns that surpass inflation, thereby preserving and growing your wealth.
Multipl leverages the power of mutual funds. The app allows individuals to invest a fixed amount of money regularly through Systematic Investment Plans (SIPs). This approach combines consistent and disciplined investing with the power of compounding, which benefits the investors.
Diversifying your mutual fund portfolio across various asset classes can help reduce risk and enhance returns. Different assets respond differently to inflation, so having a mix of investments can help you maintain your purchasing power.
While mutual funds offer inflation-beating returns, you can also invest a portion of your portfolio in fixed-income investments. However, make sure these investments provide yields higher than the prevailing inflation rate to avoid losing purchasing power.
As inflation rates change, it’s crucial to reevaluate your financial goals and investment strategy. Regularly reviewing and adjusting your investments ensures that your portfolio remains aligned with your objectives and keeps pace with changing economic conditions.
Maintaining an emergency fund is important to prevent dipping into your long-term savings during unexpected financial challenges. This can help you avoid prematurely selling investments in a downturn, which might negatively impact your overall returns.
Create Your Emergency Fund with Multipl today!
Inflation is an integral part of the economic landscape, and its impact on your future savings cannot be underestimated. By understanding the dynamics of inflation, adopting prudent investment strategies, and exploring inflation-protected financial instruments, you can safeguard your savings from losing value and work towards achieving your long-term financial goals in an ever-changing economic environment. Remember that while inflation may be a challenge, it can also be an opportunity to make informed financial decisions that help secure your financial future.
Multipl is the world’s first “Save Now, Pay Later” app which helps you create goal-based investments.
Based on the duration, purpose, and risk profile, Multipl allocates appropriate assets (mutual funds) in your personalised investment portfolio so you can reach your goal with maximum safety and liquidity. You can create both short-term and long-term savings goals like Gadget Goal, Vacation Goal, Child’s Education Goal, Retirement Savings Goal, Down Payment Savings Goal, and many more. In addition, brands co-invest with you to save more towards your goals. To learn more, download the Multipl app on Android & iOS now!