There is a common misconception that keeping your money hidden under a mattress or locked in a zero-interest savings account is the "safest" thing you can do. After all, the stock market can crash, but cash is cash, right?
Wrong. Uninvested cash is entirely exposed to a silent, invisible thief: Inflation.
Inflation is the rate at which the general level of prices for goods and services is rising. If inflation is at 6%, it means your groceries, rent, and gas will cost 6% more next year. Consequently, every rupee you own loses 6% of its purchasing power.
The purchasing Power Decay
Use the interactive chart below. Input a lump sum of cash and an estimated average inflation rate. Watch how violently your wealth erodes over 30 years if you don't invest it.
How to Fight Back
If inflation is a guaranteed 6% tax on your cash every year, the only way to avoid getting poorer is to grow your money at a rate higher than 6%.
- Investing in Equities: The stock market is the most historically proven hedge against inflation. Businesses raise prices during inflationary periods, meaning their revenues and stock prices generally climb with inflation.
- Real Estate: Owning physical assets like a home protects you, as the value of the asset and the rent you can charge both increase with inflation. Additionally, if you have a fixed-rate mortgage, you are paying the bank back with future rupees that are worth less than today's rupees!
- Increasing Your Income: You must aggressively negotiate your salary or raise your business rates every year by at least the rate of inflation. If you don't get a 6% raise when inflation is 6%, you took a pay cut.
Keeping an emergency fund in cash is essential. But hoarding cash beyond that is a guaranteed way to lose wealth. Invest your surplus immediately!