Inflation illusion!!

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The illusion of inflation is something that our mind does not accept easily. Inflation is the biggest factor which acts like a silent destroyer of our wealth. We hardly imagine it mainly because it is a slow poison for our wealth.

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Inflation illusion!!

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Let me explain it with some simple examples like how our mind is not ready to accept. Here, I am taking two scenarios. One is of the past and the other of the future.

# Past

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Let’s say you are currently 40 years old. When I say 20 years ago, our house used to cost around Rs 20,000, you accept it. Because you too can go through the same budgeted household expenditure.

If we include 8% of inflation in this Rs 20,000, it is approximately Rs 86,000 in today’s value. To lead intuitively with the fundamentals, it may be much needed in the present scenario. As we knew about an expenditure of Rs 20,000 20 years ago and as our current expenses are also around Rs 86,000 to Rs 1 lakh, we readily accept it.

In fact, you must have heard many old people say that when they were young, the cost of a house was around Rs 50 to Rs 100. Also, you must have heard from the same old people that their income used to be around Rs 200 to Rs 500.

We experience happiness by dreaming of past expenses. Because the numbers currently look very low.

# Future

Let us now consider the same example of a 40 year old man. Assuming the current expenditure is around Rs 93,219, an inflation of 8%, then when he reaches 60 years (20 years from now), the same Rs 93,219 will be Rs 4,34,490!!

Since the expenditure from the past Rs 20,000 to today’s Rs 93,219 is correct, the future expenditure of Rs 4,34,490 should also be correct. Because in both the cases we considered the same inflation rate. However, our mind is ready to accept the past but not the great numbers of the future.

If we go further and try to calculate the random retirement fund required for this guy by assuming inflation = return on investment (just for simplicity), how much should he have for retirement?

Assuming he retires at the age of 60 years and has a life expectancy of 80 years, an inflation rate of 8% and the return on investment is also the same as 8% during retirement, then Rs.4,34,490*12*20=Rs. 10, 42,77,600. It may shock us to imagine a retirement corpus of around Rs 11 crore today. However, these are all true values ​​because we have considered the same inflation rate for the past, present and future. If we draw it through the graph, it looks like below.

Therefore, I call this illusion the inflationary illusion. We are ready to accept the past. Because standing today the past number seems very small. However, with the same inflation rate, the future numbers become unimaginable to us.



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