Friday, March 28, 2008

Inflation - How it Eats Your Money

Inflation is an economic concept. Its causes are many, but what is important to us is the effect of inflation!.

The effect of inflation is the prices of everything going up over the years. A movie ticket was for a few paise in my dad’s time. Now it is worth Rs 50. My dad's first salary for the month was Rs 400 and over the years it has now become Rs. 75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up.

If you really think about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs 10, nowadays you will not be able to buy for Rs 400 also. The worth of money has reduced! If this is still not clear consider this, when my father was a kid, he used to get 50 paise pocket money. He used to use this money to go and watch a movie (At that time you could watch a movie for 50 paise!)

Now, just for the sake of understanding assume that my dad decided in his childhood to save 50 paise thinking, that one day when he grows to be a man, he would go for a movie. Many years pass. The year now is 2006. My dad goes to the theater and asks for a ticket. He offers the ticket booth guy at the theater 50 paise and asks for a ticket. The ticket booth guy says, “I am sorry sir, the ticket is worth Rs 50. You will not be able to even buy a vada pau with the 50 paise!!”

The moral of the story is that, the worth of the 50 paise reduced dramatically. Fifty paise could buy a whole lot when my dad was a kid. Now 50 paise can buy nothing. This is inflation.

So what does inflation tell us?

It tells us that you must never keep your money stagnant. If you just save money by putting it your safe, it will lose value over time. If you have Rs 1000 in your safe today and you keep it there for 10 years or so, it will be worth a lot less after 10 years. If you can buy something for Rs 1000 today, you will probably require Rs 1500 to buy it 10 years from now. So do not keep money locked up in your safe. Always invest money. Always make your money grow.


Whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be loosing money without even knowing it. The more money you keep stagnant the more money you will be losing.

Source: www.indiahowto.com

Posted by Eclectic Investor at 5:30 PM  

1 Comment:

Prima Donna said...

Hi,

Fifty paise is pretty much out of circulation. What is even more amazing is that the bills we pay often have a weird 'paise' figure which is often rounded of by the company to ease transaction processes. If you are alert, you may pay the exact amount by check but if you you are making a cash payment its qite possible that you end up paying the company a few extra paise on each transaction.It would take a maths genius to calculate how much extra unaccounted for income the companies generate through this procedure.

8:27 PM  

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Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


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