Personal finance for youngsters: A new book explains the effect of inflation on investments

What is inflation?

Inflation refers to a phenomenon of rising prices or falling purchasing powers.

Price, as you may well be aware, is a function of demand and supply.

When the demand for a product or commodity goes up, its price goes up.

When the supply of a product or commodity goes up, its price comes down.

Get off the treadmill

Effect of inflation is bad enough even when you are younger, since you need to make sure that your earnings grow faster than the rate of inflation. Else it will appear that you are making more money than before, whereas in real terms, the purchasing power of your income will actually be falling.

While you are still working, the impact of inflation is partially, or entirely, offset by a continuous increase in income or profit.

But inflation is a killer once you have stopped earning. If you have not invested wisely, it might well happen that the nest egg you have kept aside to live on post-retirement may not even suffice you for a few months.

The purchasing power of your savings dwindles as goods and services increase in price.

How much will you need to compensate for the impact of inflation?

Unfortunately, it is not possible to predict inflation with any precision....

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