We live in times when the prices of commodities and services are rising every year. Inflation, or the sustained increase of prices of goods or services, can also be understood as the falling purchasing power of currency. So, a product that you can buy for Rs 500 today, will cost more than 500 next year and the year after. From the time money entered our lives as a medium of exchange, people started saving some money to safeguard against times when they might not have an income in the future or to provide for big-ticket expenses like marriage, children’s education, etc. However, merely saving money is not enough. If your money does not grow with the speed of inflation, or better, then you might find yourself short of funds when you really need it in the future. In this article, we will look at seven ways in which you can defeat the financial enemy of the world – Inflation.
Most of us fail to realize the benefit of savings during our younger days. We tend to relax, thinking that we have a lot of time on hand to save and invest for our future. However, the sooner you start saving, the lesser risk you will need to take with your investments and the bigger your corpus can grow. This is primarily due to the power of compounding.
Compounding is when the interest earned by your investment earns further interest after being reinvested. To give you a perspective, if a 22-year-old starts saving Rs 5,000 every month, and invests it in an option offering an interest of 7 per cent per annum with quarterly compounding, then
Please note, this example is cited for representational purpose only and foes not include taxes, fees and/or charges.
The point is that the same amount of money invested every month as a part of a savings plan can fetch you much higher returns if the tenure is longer.
While many of us start saving, you tend to give in to temptation and utilize our savings for purchases or other requirements. It is important that you budget your expenses in a manner that allows you to save and not touch the savings for any reason, except emergencies.
Merely saving is not going to help you fight inflation. You need to invest your money too. However, before you start putting your money in tools that promise great returns, it is important that you understand your investment profile. This includes assessing your financial objectives, risk preference and the time horizon of investment that you are looking at.
Many people invest in stocks because they think it is the best way to generate wealth. However, among these the investors do not understand the working of the stock markets well usually tend to lose money by not making decisions at the right time.
All investments some risk associated with it. You can’t avoid the risks. However, you can deploy different techniques to mitigate the risks involved. If you are a low-risk investor, then you must steer clear of any investment option that talks about medium-high risks.
If there is one weapon that can help you fight the dual demons of inflation and investment risk, then that weapon is diversification.
Looks like a never-ending loop, doesn’t it? Diversification is a tool that can help you get the best of both the worlds. Divide your portfolio between high, medium and low risk options. While the high-risk investments fetch you good returns, the low-risk ones help steady the ship.
When we talk about investments, most of us think fixed deposits, shares, mutual funds, real estate, gold, etc. These options have been around for many years and have a certain risk-reward ratio associated with them. However, times are changing fast and you need to look at non-traditional options to be able to stay ahead of inflation at all times.
One such option is Peer to Peer Lending. A P2P lending platform allows you, as a Retail Investor, to lend funds directly to a Retail Borrower, without the intervention of a bank. This gives you an opportunity to earn higher returns without any associated market risks. Further, platforms like People Lend, offer a double-level diversification option which can help you hedge against the risk of default while earning returns capable of beating inflation.