Why Value of money decreases due to Inflation and the importance of saving money!

Inflation

Inflation causes the value of money in your hand to decrease.

In simple terms, take a basket of goods in your home and think how much did you pay to buy the basket of goods today and how much did you pay to buy the same basket of goods last year. The price difference is caused by inflation.

Imagine you bought the basket of goods for 100₹ now and then you buy the exact same basket of goods for 110₹ at the end of year 1. Then the inflation rate is 10%.

Now let’s imagine you put your ₹100rs in FD and you earn 5% interest. And you earn ₹105 at the end of year 1. ₹100 is your investment and ₹5 is your interest earned. However the inflation of 10% will eat your actual return from the money.

The actual value of money has decreased by 10% due to inflation, and an increase in value of money by 5% due to FD interest rate, which sums up to negative 5%.

Therefore investing money in financial instruments is more important than keeping it in your cupboard. This helps to increase the value of money.

Happy learning!

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