Silent Money Killer: Loss of Buying Power

In personal finance, we often worry about losing money in the stock market, dislike the volatility associated with equities or mutual funds, or feel anxious about missing out on a hot investment tip. Yet the biggest threat to our wealth is far quieter and far more dangerous: loss of buying power. It is the invisible erosion of your money caused by inflation - a force that operates every single day, without pause, without headlines, and often without being noticed until it is too late....

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Silent Money Killer: Loss of Buying Power

In personal finance, we often worry about losing money in the stock market, dislike the volatility associated with equities or mutual funds, or feel anxious about missing out on a hot investment tip. Yet the biggest threat to our wealth is far quieter and far more dangerous: loss of buying power. It is the invisible erosion of your money caused by inflation - a force that operates every single day, without pause, without headlines, and often without being noticed until it is too late.
Inflation does not take away your capital visibly. It does not reduce the number in your bank account. Instead, it reduces what that number can buy. A Rs 100 note today buys far less than what it did ten years ago. This gradual and relentless decline is what truly destroys long-term financial security. The real damage happens when people invest in financial products that earn less than 10 per cent returns, especially over long periods. India’s long-term inflation averages around 6 to 7 per cent. When you add lifestyle inflation - the rising cost of healthcare, education, housing, travel, and personal aspirations - your effective inflation rate is often much higher. So, if you are earning 5 to 8 per cent on your money, you are not growing your wealth. You are moving backward. This is why low-yield products, despite feeling safe, often end up becoming wealth destroyers. Your money appears protected, but its strength - its ability to buy goods, services, experiences, and opportunities - is weakening year after year. Fixed-income products like bank fixed deposits and recurring deposits are essential, but only for short-term goals within the next three years. Beyond that period, the returns simply do not keep pace with inflation. A few products are a financial mess - they are locked in for the long term with poor liquidity and still give less than 8 per cent returns, which creates major problems in your financial goals journey. To genuinely grow wealth, your investments must consistently outperform inflation and achieve more than 10 per cent returns. For long-term financial goals - whether 5, 10, or 20 years away - only a few asset classes have historically achieved this: Direct stocks Equities represent ownership in businesses. As companies grow their revenues and profits, shareholders participate in that growth. Over long horizons, equities remain one of the most reliable inflation-beating asset classes. Equity and hybrid mutual funds These funds offer equity-debt-gold diversification, professional management, and disciplined investment structures that are essential for long-term compounding. Gold Gold has been a time-tested hedge against inflation and periods of economic uncertainty. Ultimately, financial planning is not about protecting your principal. It is about protecting and enhancing your purchasing power. That is what funds your child’s education, your child’s marriage, your retirement lifestyle, and your long-term dreams. Inflation does not announce its arrival. It works silently. The only defense is intelligent asset allocation and a long-term investment mindset. Your money is supposed to work for you. Make sure it continues to do so - not just in numbers, but in real value. (The author is a Chartered Accountant and CFA (USA). Financial Advisor.Views personal. He could be reached on 9833133605.)

Retirement - Your Biggest Festival

Kaustubh Kale
Nov 4, 2024
2 min read

Updated: Nov 7, 2024

During the recent festive season—Navratri, Dussehra, and Diwali—you’ve likely noticed how expenses tend to surge during these times. Expenses do rise significantly during festivals and vacations. Similarly, retirement, often viewed as the grandest festival and vacation of your life, can bring higher financial demands due to increased free time and completing your wishlist. This is why proper retirement planning is crucial. If not planned properly, you would have to significantly tone down your standard of living, post-retirement.

When Should You Start Planning for Retirement?

The simple answer is: as early as possible. Ideally, retirement planning should start the moment you begin earning. Your first salary isn’t just for your present self; it’s also for securing your future.

Let us say that you start working at the age of 25. Your employer is giving you a salary. You plan to work till the age of 55 (for 30 years). Is your salary only for these 30 years? That is not the case. When you are working for 30 years, your employer is paying salary not only for your 30 working years but also for the years that you will stay alive after retirement. It is not only for the expenses from age of 25 to 55 but also for the expenses from age 55 to 85 years (assuming life expectancy).

The Power of Compounding

Many youngsters delay retirement planning, assuming they have time, but starting early allows you to build substantial wealth over the years. You can take advantage of the power of compounding—where the money you invest grows exponentially over time. For example, if you consider a Systematic Investment Plan (SIP) in equity mutual funds, the longer your money stays invested, the more it grows. The earlier you start, the smaller the monthly investment required to achieve a large corpus at retirement. The more you delay, the harder it gets.

Planning with a Financial Expert

Firstly, take help of an expert - a financial advisor. Wealth creation and achieving financial goals is not a do-it-yourself activity. It is sensitive and complicated - the cost of doing nothing and going wrong is massive!

Parameters for Retirement Planning Calculation

Here are key parameters to consider when calculating your retirement needs:

• Current Age

• Target Retirement Age

• Current Monthly Expenses

• Inflation Rate

• Life Expectancy

For example, if you're 30 today, planning to retire at 55 with an assumed life expectancy of 85, and your current monthly expense is 50,000, inflation (around 6%) would push your retirement fund requirement to 7 crores. A monthly SIP of 45,000 in equity mutual funds can help you reach this goal over 25 years.The later you start, higher your monthly expenses and sooner you wish to retire - all 3 parameters would increase your retirement corpus requirement.

Don't Forget Lifestyle Inflation

Retirement is not just about covering basic needs. Like how expenses rise during vacations and festivals due to improved standards of living, retirement may bring luxury inflation as you pursue hobbies, travel, and new experiences. Planning for these lifestyle upgrades is essential to ensure financial freedom.

Start Now

Achieving financial freedom isn’t difficult, but it requires discipline. If you haven’t started yet, the next best time to begin is now.

(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal.)