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Personal Finance

Inflation Adjusted Investment

Manish has an excellent article on Jago Investor: How Inflation eats your money. What I was thinking – yes, you could save a constant amount today to try and reach an inflated adjusted goal tomorrow. Like in Manish’s article, he talks about Ajay who needs to meet a 20 year goal to plan for his daughter’s education, which would cost 4 lakhs today, but 8% inflation would cost him Rs. 18.64 lakh after 20 years.

That will take a monthly investment of Rs. 2,046 per month, he says, assuming you can get a 12% return per year.

But if Ajay starts after 10 years, he’ll have to invest Rs. 8,400 per month. Much higher, you think? Yet, with 8% inflation, that is worth just 3,890 worth of today’s money. Not quite as much higher – and probably just as affordable.

But then, you are likely to get salary hikes, at least to the same level as inflation. If you don’t, you’re retired – in which case you’re not saving. So let’s assume that you save a constant percentage of your income – even though nowadays, you save a much higher percentage of your salary as you grow older. So the amount you save per month increases every year, by about 8%, the inflation rate you assume your expenses grow by.

That means to achieve this goal of 18.64 lakhs in 20 years, with an average increase per year of 8%, you need to invest just Rs. 1,100 per month.

And then you may decide that heck, I’ll pay in only for 10 years, and let the funds grow for the remaining 10 years. For that, you only need Rs. 1,826 per month.

Your burden increases every year, but so does inflation, and in that sense, your income. The question, rightfully, is: how can you calculate the total money you need to invest for a certain goal, with an “inflation linked investment” pattern? Stay tuned, I’ll post a calculator soon.

  • Baishampayan says:

    >+5 insightful.

    There is a typo in the last sentence of the first paragraph, though. You missed the unit (Lakh).

    "…which would cost 4 lakhs today, but 8% inflation would cost him Rs. 18.64 [lakh] after 20 years."

    BG