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IMPACT OF INFLATION ON FINANCIAL GOALS

Inflation and Tax are inevitable in everyone’s financial journey. Though it is more of an economic terminology, all of us are practically experiencing the impact of inflation in our day-to-day life. It starts from fuel, groceries and goes all the way to our major financial goals like higher education costs, retirement corpus etc.

Sadly, inflation is often underestimated and investors realize the heat of inflation only around the time they need money. Let us look into some real-life examples.

• Petrol that costed around 28 rupees per liter in the year 2000 costs 102.63 rupees today. This is almost 4x rise at an inflation of 6% per year.
• My college tuition fee which was 18K per year in the year 2001 costs 2L per year today. 11x rise at an inflation of 11% per year. School fees have also increased considerably.
• Healthcare costs have also sky rocketed. Inflation in healthcare sector is one of the highest.

With these very few examples, you can understand the impact of inflation. For long term goals that are away 15-20-30 years away – the effect of inflation will be huge. Inflation also compounds over years. Hence, it becomes important for an investor to factor inflation for his/her financial goals.

Let us do with some examples. Average lifestyle inflation can range 6-7%. Inflation in healthcare and education are usually higher and it is better to consider at 10%. You can’t go wrong by planning on the higher side but you will definitely fall short by underestimating. 

The above table explains the impact of inflation on some of the common financial goals. You need to understand that you will need the inflated cost upon the time of the goal and plan your investments accordingly.

Note – Any investment that doesn’t give inflation adjusted returns (post tax) will not grow your money. It will de value your investments. Think wise when you make the investment choices! Traditional investments do not provide returns adjusted for inflation.

INFLATION is not in your control but INVESTMENTS are! Think smart!