Say, you wish to purchase a car, which costs Rs. 10 lakh today. You decide to save enough every month from your salary to buy your dream car. 5 years later, when you have accumulated the amount, you are informed that your saved amount is no longer enough to purchase the car. You wonder why. The answer is inflation.
Inflation, in simple terms, means the rise in the value of commodities with time. For instance, an ice-cream today does not cost the same it did a few years ago. The effect on commodity prices also has an unintentional effect on your savings.
Let’s take a look.
Inflation reduces the purchasing power of money
Currently, the inflation rate in India is 4.87%, recorded in May 2018. This means, say a commodity, which costs you Rs. 10,000 today will approximately cost Rs. 15,951 after 10 years. This is how inflation erodes the purchasing power of money. So when you reserve X amount of money for your future, it may not be able to sustain you for as long as you planned. Hence, it is crucial for you to consider inflation when you plan your goals’ finances. This plays a major role when you have long-term goals like buying a home or a car.
Counter inflation by investing
Controlling the economy or inflation may not be in your hands, but countering it by taking an active interest in how you save, can. To counter growing inflation, ensure your money grows too. There are various investment options available that help you grow your money and help you save taxes! Ranging from the most conventional forms of investing like Fixed Deposits (FDs) and Public Provident Funds (PPFs) to market-linked options like the Stock Market and Mutual Funds.
Investment Options And Their Growth
Since the money in your FD is invested in government bonds, the returns you get are guaranteed. Market fluctuations do not affect your FD investments. It also provides you with cash liquidity. If you ever face a cash crunch, you can easily break an FD and use the cash. You can avail tax benefits on your investments under Section 80C of the Income Tax Act, 1961. The maximum limit for this benefit is Rs. 1.5 lakh.
Public Provident Funds
With a minimum amount of Rs. 500, you can start investing in a PPF account. This account also comes with a maximum amount of Rs. 1.5 lakh per year. Tax benefits can be claimed for this amount under Section 80C of the Income Tax Act. Any amount invested above the said limit will be eligible for tax. This scheme has a maturity period of 15 years, which can be extended for an additional 5 years.
An insurance policy gives you a hand in dealing with rising healthcare costs in the country. Instead of having a separate savings pool for medical expenses, purchase an insurance policy. With low premiums, you can get high coverage amounts. The premiums paid will also qualify for tax benefits under Section 80C and 80D (in case of health insurance).
With a Unit-Linked Investment Policy (ULIP) policy, you get dual benefits: insurance coverage and investment returns. The premiums you pay are divided into two parts; one is used as the cost towards your insurance coverage and the other is invested in funds pre-approved by you. The amount you invest in a ULIP policy can be claimed for deductions under Section 80C (life insurance) or 80CCC (pension).
Annuity plans were introduced as a scheme to encourage people to save for their retirement. Consistent investments in these plans allow you to have a regular payout after you retire. These payouts can last for life, depending on the amount you have invested. These plans also qualify for tax deductions under Section 80CCC of the Income Tax Act.
A judicious investment plan with a diversified portfolio can help you face and counter inflation