Lesson 2 of 6, 4 minutes
Inflation
Why the same amount buys less every year, and how to read any future number.
Ask a parent what a cinema ticket cost when they were your age. The answer will sound impossibly small. Nothing was wrong with their money. Prices rose a few percent a year, every year, and the years added up.
That slow rise is inflation. At 6% a year, a month of living that costs ₹80,000 today costs ₹1.43 L in ten years. You are buying the same groceries and paying for the same flat. Only the price has moved.
- Today₹80,000
- In 10 years₹1.43 L (₹80,000 in today's money)
- In 20 years₹2.57 L (₹80,000 in today's money)
- In 30 years₹4.59 L (₹80,000 in today's money)
One amount, written two ways
Inflation makes future amounts hard to judge. Suppose a plan says you'll have ₹8.63 Cr in 25 years. Is that a lot? You can't tell until you know what things will cost in 25 years.
So this site writes every future amount twice. The first value is in the money of its own date, which is what a bank statement would show on that day. The second is the same purchasing power in today's money, which you can hold against prices you know. The plan above reads ₹8.63 Cr (₹2.01 Cr in today's money). The second figure is the one to plan with.
A raise below inflation is a pay cut
The arithmetic works on income too. If prices rise 6% in a year and your pay rises 4%, the number on your payslip went up and you can buy 1.9% less than last year.
Idle money loses value the same way. Keep ₹8.00 L as cash for 10 years and it will still be ₹8.00 L. It will buy what ₹4.47 L buys today.
Do this week
- Choose one inflation figure for your planning and keep it. If you change it every month you can't compare this year's plan with last year's.
- When someone quotes a future amount, such as an insurance payout or a maturity value, ask what it is in today's money. Divide it by (1 + inflation) raised to the number of years.
- Compare your last raise with the rise in prices over the same year. If the raise was smaller, your spending power fell.