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How Inflation Erodes Savings Over The Year?

Published On May 27, 2021 1:00 PM By InsuranceDekho

Inflation has an eroding impact on our savings and investments. Hence, it becomes necessary to acknowledge the effects of inflation on savings and investments. Also, the more important element is to invest in savings and investment plans that can help you beat inflation upto some extent and actually yield returns on your investment. Let us first understand what does the word inflation mean? 

What is Inflation?

Inflation means a gradual increase in the price of goods and services, which declines the purchasing power of money. Do you remember the cost of movie tickets 10 years ago? The cost for the same is much higher today, and it is because of the sole reason i.e inflation. Likewise, we can say that with 2% inflation, a packet of potato chips that cost you INR 100 today will cost you INR 102 in the following year.

How Inflation Impacts Your Savings and Investments?

Every increase in the prices is bound to  affect your cost of living, leaving a void in your savings and investments. The main reason is, with the rise in inflation, the same amount you save or invest from your income every month may not rise at the same rate after some years. Hence, the rise in price exerts extra pressure on your savings and investments. Due to the adverse effect of inflation, after a few years, the funds you have saved will provide you a lesser number of goods and services.

Example of How Savings Erode Savings and Investment?

Supposably, you have INR 2,000 in your savings account today. The interest you usually earn on your savings is say 5%. So, after a year, you will have INR 2,050 in your account. Now let’s assume, during this period, the rate of ongoing inflation is 10%. This means that the price of a particular commodity, which is INR 2,000 now, will be increased to INR 2,100 next year. Now, even if your investments are likely to grow by 5%, the commodity price will grow by a whopping 10%. This results in a negative rate of return, or we can also say that you have to shell out more than what you have at your disposal. Thus, inflation lowers your purchasing power and feeds on your real returns on savings and investments.

After understanding the possible impact of inflation, let us now see how to beat the impact of inflation with the help of tax saving investment plans. It helps in Protecting your savings in the way of investing in Life Insurance Savings Plans or ULIPs. 

Beating Inflation

To possibly overcome the impact of inflation, you are advised to invest in financial products offered by various companies like tax saving schemes and myriad savings plans that are known to give you a higher rate of return as compared to the ongoing rate of inflation. Some of the other investment options are investing in stock market, mutual funds, property, bonds, gold, systematic investment plans (SIPs), life insurance plans, ULIPs, etc. to name a few. Such investments will end up growing your savings and also provide you with a hedge against inflation.

Also Read

When Is The Right Time To Invest In A Retirement Plan?

Benefits of Purchasing Retirement Plans

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.        


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