Time Value of Money

You often hear about the rising inflation rate. But do you measure how your purchasing power is getting affected simultaneously? Suppose you have 100 bucks during the start of 2020 and the inflation rate is 10% for the year 2020. So how much money do you have by the end of 2020? You still have that 100 bucks in cash, but your purchasing power has decreased.

Let me take a simple example. Suppose the price of wheat is 10 per kg so you can 10 kg for 100 bucks during Jan’20. However, due to inflation, the prices of wheat rises to 11 per kg. Therefore, by end of 2020 you can buy only 9kg. Eventually you have a loss of 1 kg of wheat without doing anything. That’s how inflation is so powerful.

Now you know why it is so important to keep growing your money and to measure your investment returns against inflation. If you are happy to have made 10% return on investment and the inflation is also 10% then basically your net profit is zero. Read again if still in doubts!

#FridayforFinance