Inflation, is an economic concept.

What the cause of inflation is,

is not important to us from the point of view of this article. What

is important to us is the effect of inflation! The effect of inflation

is the prices of everything going up over the years. 

A movie ticket was for a few paise in my dad’s time. Now it is

worth Rs.50. My dads first salary for the month was Rs.400 and

over he years it has now become Rs.75,000. This is what inflation

is, the price of everything goes up. Because the price goes up, the

salaries go up.

If you really thing about it, inflation makes the worth of money

reduce. What you could buy in my dad’s time for Rs.10, now a

days you will not be able to buy for Rs.400 also. The worth of

money has reduced! If this is still not clear consider this, when

my father was a kid, he used to get 50paise pocket money. He

used to use this money to go and watch a movie (At that time you

could watch a movie for 50paise!)

Now, just for the sake of understanding assume that my dad

decided in his childhood to save 50paise thinking, that one day

when he becomes big, he will go for a movie. Many years pass.

The year now is 2006. My dad goes to the theater and asks for a

ticket. He offers the ticket-booth-guy at the theater 50paise and

asks for a ticket. The ticket booth guy says, “I am sorry sir, the
ticket is worth Rs.50. You will not be able to even buy a “paan”

with the 50paise!!”

The moral of the story is that, the worth of the 50paise reduced

dramatically. 50paise could buy a whole lot when my dad was a

kid. Now, 50paise can buy nothing. This is inflation. This tells us

two important things.

Firstly: Do not keep your money stagnant. If you just save money

by putting it your safe it will loose value over time. If you have

Rs.1000 in your safe today and you keep it there for 10years or

so, it will be worth a lot less after 10 years. If you can buy

something for Rs.1000 today, you will probably require Rs.1500

to buy it 10 years from now. So do not keep money locked up in

your safe. 

Always invest money. 

If you can’t think where to invest your money, then put it in a

bank. Let it grow by gaining interest. But whatever you do, do not

just lock your money up in your safe and keep it stagnant. If you

do this, you will be loosing money without even knowing it. The

more money you keep stagnant the more money you will be

loosing.   

Secondly: When investing, you have to make sure that the rate of
return on your investment is higher than the rate of inflation.

What is the rate of inflation?

As we said earlier, the prices of everything goes up over time and

this phenomenon is called inflation. The question is: By how much

do the prices go up? At what rate do the prices do up?

The rate at which the prices of everything go up is called the

"rate of inflation". For example, if the price of something is

Rs.100 this year and next year the price becomes approximately

Rs.104 then the rate of inflation is 4%. If the price of something

is Rs.80 then after a year with a rate of inflation of 4% the price

go up to (80 x 1.04) = 83.2

What is the rate of return?

The rate of return is how much you make on an investment.

Suppose you invest Rs.100 in the market and over a year, you

make Rs.120, then you rate of return is 20%.