I always thought of writing something about it but never did. But when I read this news yesterday I could not help but write this. According to The Telegraph, inflation destroyed savings worth $58 billion in UK in just one year! Why it happened? Average rate of interest earned by people on their savings account was about 1.6% and inflation was about 5.2%. Now compare that to what is happening in India: savings account rate is around 3.5% and the wholesale inflation rate hovers around 8.5-9%. And the extent to which WPI underestimates the actual inflation is a foregone conclusion now. Assuming the savings rate of 3.5% and inflation rate of 9% (on a conservative note as the actual rate is much higher than this considering the limitations of WPI), we see that Rs.100 deposited in a bank account become Rs.94.5 (Rs.100+3.5-9) by the end of the year.
This is not nuclear science and we all know it. Now if this situation persists for a longer period of time people start forming an opinion about the situation which basically leads to two kinds of actions. Some (those who like to live for the moment) may be inclined to think that despite savings if their money is getting eroded, they might as well spend it now which leads to even more inflation! So this not only leads to problems for economy as a whole but it creates more problems especially for those who decided to save as they have postponed their purchases, they are missing out on an opportunity to buy at current rates, and also they will see their savings account shrink for deciding to save! There are some who think the other way: they believe if anyways their money has to erode by the end of the year they might as well save some more money for future requirements. This in turn will lead to control the inflation to the extent they save which will benefit those who are buying at this stage (the live for the moment type)! Whichever way you consider, in such a situation those who decide to spend now benefit and those who decide to save lose. But those who save are immunizing themselves against any future emergency which is not possible if you decide to spend all that you have. So eventually it is a fight between those who live for the moment and those who live for the future.
Let us see what an overdose of either of these situations can lead to. If most of the people start spending their money like there is no tomorrow just to beat erosion in savings, we will be encountering even more inflationary situation in the future. Secondly, if all of them decide to save their money for the future it will lead to lesser demand, decrease in production accompanied by loss of jobs etc. So what is the solution? The answer is to strike the balance between present and future needs by doing some financial planning! If you have observed when we say ‘spending’ money we are talking about spending it on food, clothes etc. So the idea is to make sure that the ‘spending’ part has ‘planned investment’ as one of its components. What this will do is that it will take the money out from the savings account so you will not lose money due to inflation and also it will provide for your future needs so it takes care of future emergency as well. I admit, this is what all of us do and that this does not warrant a torture in the form of such a long and boring post but as we see there are lot of issues in the economy so I am sure there are some who are not doing what is mentioned and messing things up. This is post is dedicated to all of them! I also confess that this post could have been a one-liner but since I had some free time I thought of stretching that one-liner!
This is not nuclear science and we all know it. Now if this situation persists for a longer period of time people start forming an opinion about the situation which basically leads to two kinds of actions. Some (those who like to live for the moment) may be inclined to think that despite savings if their money is getting eroded, they might as well spend it now which leads to even more inflation! So this not only leads to problems for economy as a whole but it creates more problems especially for those who decided to save as they have postponed their purchases, they are missing out on an opportunity to buy at current rates, and also they will see their savings account shrink for deciding to save! There are some who think the other way: they believe if anyways their money has to erode by the end of the year they might as well save some more money for future requirements. This in turn will lead to control the inflation to the extent they save which will benefit those who are buying at this stage (the live for the moment type)! Whichever way you consider, in such a situation those who decide to spend now benefit and those who decide to save lose. But those who save are immunizing themselves against any future emergency which is not possible if you decide to spend all that you have. So eventually it is a fight between those who live for the moment and those who live for the future.
Let us see what an overdose of either of these situations can lead to. If most of the people start spending their money like there is no tomorrow just to beat erosion in savings, we will be encountering even more inflationary situation in the future. Secondly, if all of them decide to save their money for the future it will lead to lesser demand, decrease in production accompanied by loss of jobs etc. So what is the solution? The answer is to strike the balance between present and future needs by doing some financial planning! If you have observed when we say ‘spending’ money we are talking about spending it on food, clothes etc. So the idea is to make sure that the ‘spending’ part has ‘planned investment’ as one of its components. What this will do is that it will take the money out from the savings account so you will not lose money due to inflation and also it will provide for your future needs so it takes care of future emergency as well. I admit, this is what all of us do and that this does not warrant a torture in the form of such a long and boring post but as we see there are lot of issues in the economy so I am sure there are some who are not doing what is mentioned and messing things up. This is post is dedicated to all of them! I also confess that this post could have been a one-liner but since I had some free time I thought of stretching that one-liner!
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