“Today I have accumulated enough money to buy a new bicycle for myself”, said Rahul, a 13 year old kid, who was saving money from last 3 years in his piggy bank. He was quite impressed with his father’s philosophy of saving money to fund your requirements. “Dad, please take this money and buy me a new bicycle with this” urged Rahul with glittering eyes.
“This money isn’t enough to buy your bicycle, Son” Said his father, Suresh.
“But Dad, I had checked the price of the bicycle. It was Rs. 1800. And thus I was saving Rs. 50 every month since last 3 years, so that I accumulate Rs. 600 every year and Rs. 1800 at the end of 3 years” Said Rahul.
“The money is Rs. 300 Short of what is required to buy the bicycle” Said Father Suresh.
“No Dad, that’s not possible. It was properly locked in my piggy bank. Who can steal it from there?” Rahul was confused.
“Rahul, the one who has stolen your money is ‘Inflation’ ” Said Father Suresh.
“Who is this inflation, Dad? Why is he stealing my money?”
“Son, inflation means the rise in prices. Your piggy bank money still counts Rs. 1800. But the price of bicycle has gone up in these 3 years to Rs. 2,100. This is how the inflation has reduced the value of your money by Rs. 300 in 3 years. Or you can say, that it has “Stole” Rs. 300 from your savings.” Explained father Suresh.
“How can I protect my money from getting stolen by inflation Dad? I thought it was absolutely safe in the piggy bank” asked worried Rahul.
“The biggest risk we can take about our savings is, not investing it, Son. We think that our money is absolutely safe in our Lockers and Savings Accounts. But without even we coming to know about it, the giant called inflation eats it up. We are now talking about only 3 years. Ok, can you take a guess what would a bicycle might be costing when I was your age ?” asked father Suresh.
“I Can’t be sure Dad. But somewhere around Rs. 1000-1200.” guessed Rahul.
“Well, the right answer is Rs. 465.” Smiled father Suresh.
“Oh My God! Are you Serious Dad? That was a steal. You could have bought it with only two months savings na?” asked the super-thrilled Rahul.
“No Son. I did not used to get a pocket-money of Rs. 250 p.m. like you. My Pocket-money at that time was Rs. 50 a month. Out of which I used to save Rs. 35 every month for my bicycle. And rather than keeping it idle, I would invest it in a small savings scheme which gave me a return of around 10% p.a. at that time. This ways, I was able to accumulate an amount of Rs. 465 in a span of less than 13 months.” Explained father Suresh.
“That was really thoughtful of you Dad. I have learnt two lessons from this:
1. I will increase my saving proportion from the present 20% to at least 50% as I do not have any responsibilities currently.
2. I will invest the money smartly to generate a return higher than the inflation rate so that the “Inflation Giant” doesn’t steal my money” said Rahul.
Rahul has learnt his lesson. When are we planning to learn?
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(All the characters in the above article are hypothetical. There resemblance to any person, living or dead, will be purely coincidental)