Appreciating
the long-term impact of inflation is difficult, but necessary
One of the strange things
that came to the forefront during demonetisation was that a lot of people think
that storing cash is a form of saving. Almost all of us know of at least a few
cases where someone--often a housewife or an older person--had stored large
amounts of cash as savings. I personally came across two such cases where the
amount thus saved was several lakhs of rupees. Notably, this was not black
money. The source of the money was legitimate, tax-paid, salary income which
someone had just squirrelled away, slowly and steadily, over the years.
As far as the saving impulse
goes, this was exemplary behaviour. It takes a really strong motivation to not
spend money when it is so readily available at hand. However, beyond that, as
far as the actual mode of saving goes, this is obviously the worst thing to do.
All these people were just throwing away money. Because of the relentless rise
of prices, some five to ten per cent of the money is just wasted away every
year. Over a decade, the money was perhaps just half of what it would have
been.
One of the strange
things that came to the forefront during demonetisation was that a lot of
people think that storing cash is a form of saving. Almost all of us know of at
least a few cases where someone--often a housewife or an older person--had
stored large amounts of cash as savings. I personally came across two such
cases where the amount thus saved was several lakhs of rupees. Notably, this
was not black money. The source of the money was legitimate, tax-paid, salary
income which someone had just squirrelled away, slowly and steadily, over the
years.
As far as the saving
impulse goes, this was exemplary behaviour. It takes a really strong motivation
to not spend money when it is so readily available at hand. However, beyond
that, as far as the actual mode of saving goes, this is obviously the worst
thing to do. All these people were just throwing away money. Because of the
relentless rise of prices, some five to ten per cent of the money is just
wasted away every year. Over a decade, the money was perhaps just half of what
it would have been.
And yet, it's hard to
actually blame these people. In the mental model that they have, their money
remains the same while things get a little expensive. None of them could be
expected to understand the compounding effect of inflation. The funny thing is
that even many of the people who don't store cash and use the formal financial
system don't actually appreciate accelerating impact that this compounding
effect has. Most of us remember how little things used to cost in the past--how
a family of four with an income of Rs 10,000 a month was comfortably middle
class 30 years ago. However, it's future impact that's hard to appreciate. In
2050, a family of four will need perhaps Rs 10 lakh a month to have a
middle-class existence.
Let's look at the numbers.
If today, Rs 2 crore sounds like the kind of money you'll want twenty years
from now then you'll actually need to have about Rs 10 crore. If you work
backwards from there, you'll need to save about Rs 1.7 lakh a month if the
returns are 8 per cent. And if the returns are 10 per cent, then you will need
to save a lot less--Rs 1.3 lakh a month.
Think carefully about
this. People who are relying on deposit-type savings which yield very little
real (above inflation rate) rates of return need to save a lot more in order to
avoid old age hardship. All of us who don't have some inherently
inflation-adjusted old-age income (like rentable property) need to understand
this maths and act upon it before it's too late. This may not look urgent--you
can always postpone it to another day--but it's definitely more important than
whatever else you are planning to do next weekend.
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