Value of money today is always greater than the value of the same amount of money in the future. Because, money loses its value over time due to inflation.
Last financial year, 2021-22, the inflation rate was around 7%. Which means if you had the ₹100 last year, the actual value of it today is ₹93.
To calculate the value of money years into the future, we use the Future Value of Money (FVM) formula:
FVM = Amount * (1 + Inflation Rate) ^ years
E.g. If you want to know how much money you need 10 years into the future to do the same things you do with say ₹10,000, then:
FVM = 10000 * 1.07 ^ 20
That gives a result of a whopping ₹38,696!
Which means, to do the same things you do today with ₹10,000 twenty years into the future, you’ll need ₹38,696, assuming an annual inflation rate of 7% year on year.
So clearly, keeping your money in a savings account is a BAD idea. ⚠️
To battle this, you need to make money work for you when you are sleeping. The way to do that is to INVEST.
You need to invest your money into instruments that will grow equal to or ideally more than the inflation rate year on year. 💸
What are these ‘instruments’?
It could be any asset that can grow in value over time. Some examples include stocks, mutual funds, government bonds, gold, real-estate, etc.
Average annual returns for various assets:
🪙 Gold 24K – 10-12%
📈 Mutual Funds – 12-13%
🏛️ Government Bonds – 6-8%
🏦 Deposits (FD/RD) – 3-6%
This means, if you were to invest ₹10,000 in gold, for example, in 20 years the value of your investment would be ₹67,274, assuming an annual 10% growth.
Choose government bonds or deposits only when you need to spend money in the short term and require capital protection.
That’s it for now. 🙂
Let’s be intelligent and responsible and invest money on a regular basis. SIPs on mutual funds are my favourite.
Let me know yours in the comments. 😉
For a comprehensive introduction to personal finance and mutual funds read this module on Zerodha Varsity.
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