Yes! If you had Rs. 1000 in the year 1980, it would just be worth Rs. 68 in 2019 if we use the cost inflation index data published by the government. The trouble is this index is an underestimate and out lifestyle has changed (if not improved) with the help of technology. So actual inflation is a lot higher. Here is how we can protect our hard earned money.
I made three presentations over the last couple of days to World Bank employees in their knowledge summit and these are some slides used in the talk. I will either tape or air the talk via YouTube Live shortly. This is the cost inflation index data (CII) from 1980. In 2016, the base of the index was changed from 1980 to 2000, but I have integrated both scales into a single index.
CII is the index used for computing indexation benefits for long terms capital gains tax computation and is proportional to the consumer price index. However, it does not realistically represent the inflation in our expenses.
Cost inflation index 1980 – 2019
How Rs. 1000 in 1980 degraded over the years!
If we assume a modest (unrealistic) 5% inflation in over the next 30 years, one lakh today would be worth about Rs. 20,000! This implies that we need to invest right so that our investment grow at a pace greater than inflation after tax! The trouble is this 7% is an underestimate.
Price of petrol per litre in the metros
Fuel costs alone have increase at 6-8% over the last three decades. This means for any business to be profitable, the cost of their service or product should increase at a higher pace. Meaning, we need to shell out that much more.
Personal inflation: an example
This is my family’s personal inflation as detailed before: Inflation in India: Some Real Numbers
Notice the increase in fuel, electricity, paid-help and vegetables. All these contribute to the overall 8% number. However, this is for a frugal family that does not eat out. That does not go to malls or the cinema. We do not change smartphones, cars or television every few years. Inflation on basic necessities is 8% without considering lifestyle creep! Unless we take corrective steps, we would like the hamster running in the same place on a wheel (picture above)
Lessons from a cutting chai
Suppose you had Rs. 1 in 1990 and used 50 paisa to drink a cup of tea on the road. You invest the remaining 50 paisa and decide to drink a cuppa from that amount after 29-30 years. To so do, that Rs. 0.5 should have grown to Rs. 10! Meaning an after-tax return of about 11%.
After 20 years, tea on the street will cost about Rs. 60. If take Rs. 20 today and drank a cuppa with and invested the remaining Rs. 10, in order drink cutting chai after 20 years, the post tax return required is Rs. 10. If we choose not to take and stick to a safe return of 7%, then we need to invest 80% more!! That is Rs. 18 to drink tea after 20 years!
Would you rather invest 80% more to get safe returns or would you rather take some risk, learn to manage it and invest a reasonable amount?
This situation is a lot like a fork in the road, were you have to choose between guaranteed failure (if we do not invest enough) and a chance of success (if the risk is managed right)
How to protect our money? What is the solution?
There is no option. Unless long term portfolio have at least 60% of equity (rest in fixed income), you will not be able to beat inflation. Your purchasing power will keep going down and will hut bad when your income drops to zero, aka retirement. Therefore, start as soon as possible, invest as much as possible and build a portfolio with good equity exposure as quickly as possible. There is no other practical option.
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