“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
– Sam Ewing.
This line accurately depicts what inflation means, additionally explaining the situation of the middle-class community these days. Inflation is when, for the same amount of money, the purchasing power decreases due to increased prices of commodities. It may often lead to a huge impact on different aspects of our lives.
Inflation impacts each individual in different ways, depending on how they handle their finances. However, there are certain circumstances in which nearly everyone would experience its effects. Primarily, inflation affects purchasing power, the prices of commodities increase, reducing the value of money. Items that were once affordable with Rs. 100 may no longer be accessible in the present day due to increased costs.
But you may wonder, how does inflation impact an ordinary individual? A simpler way to explain this is that inflation affects the cost of living. It directly impacts essentials, including food, gasoline, clothes, and other necessities. Under normal circumstances, it is the middle class that bears the brunt of its impact the most!
One of the most vital aspects of personal finance is savings. When we think of savings, the first thing that often comes to our mind is the money deposited at banks. However, a significant misconception is that money in a savings account would grow due to the interest earned on the same. Unfortunately, one significant factor, inflation, gets ignored. If the interest earned on a savings account is less than the current rate of inflation, then in reality, a person isn’t earning; instead, they are losing money in terms of purchasing power.
For an individual to fully optimize the utilization of money, factors like inflation must not be ignored. Managing personal finances requires prioritizing spending based on both present and future needs. If one’s focus is on long-term financial goals, investing in different schemes with a high-interest rate would be advisable. However, generating revenue in the long-term demands much patience, and a lot more financial planning. For example, a safe and attractive option for a long-term investment is Public Provident Fund, which yields an interest rate of 8.7%.
On the contrary, if a person has an immediate need for money, he may look out for short-term revenue-generating sources, some of which are tools like shares and debentures that can cater to urgent financial requirements. The more you diversify your investments, the better equipped you will be for your future.
As mentioned earlier, financial planning is a back-breaking task. Factors like your income sources, cash flows, savings, and investments should be considered. For professional assistance, a financial adviser can also be appointed, who could help with making effective investments and analyzing expenditure decisions.
The bottom line is that an increase in inflation does increase the cost of living, and if wages or salaries don’t improve to match that, then the purchasing power of a consumer’s rupee will fall. Inflation and personal finance go hand in hand. If personal finance is an aircraft, then imagine inflation as the wind that directs its flow.
ABOUT THE AUTHOR
Hemakshi Mehndiratta
Hemakshi Mehndiratta is a dedicated student at Maitreyi College, Delhi University, where she is currently pursuing a BA (Hons) in Economics. With a strong passion for finance, she is deeply involved in conducting research in this field. Her enthusiasm for finance is evident through her commitment to her studies and her unwavering dedication to her work. Her goal is to further her education and career in finance, where she can continue to channel her passion and drive for excellence.
Well written and very informative!