Life is going to become more expensive. Your money's earning power is going to erode. Inflation is going to eat into the real value of your money. And you need to take steps to not just grow your wealth, but to grow your wealth continuously, and beat inflation by a wide margin every year.
Let's start at the beginning and move quickly into the steps we need to take to beat inflation.
Investopedia defines Inflation as: the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
This means that if you're investing for goals that are years away such as y our kids' educations, marriages, and your own retirement, you will need a lot more money when these goals actually arrive, than you would need if they were happening today.
The Government puts out 2 inflation figures every year, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). The CPI measures the consumer prices of a defined basket of commodities in different cities in India. Neither of these is the real level of inflation that affects you, the consumer. You can safely assume that the inflation level that you face is higher than even the higher of the two government released figures, that is the CPI.
With the price of fuel increasing and the monsoon being weak, inflation this year and next is likely to be higher than last year. RBI's credit policy has also voiced concern over the inflation figure which is expected to cross 8% this financial year.
So what do you need to do?
1. Look at Your Entire Portfolio One Piece at a Time, and Inflation-Proof it
In each asset class, especially today thanks to the current high interest rate scenario, you need to choose investments that have beaten inflation consistently. If, in your fixed income portfolio, you invest in a corporate FD that yields 10% p.a. post tax (considering indexation), you should note that the real return is actually closer to 3% per annum, after considering 8% inflation.
Include inflation hedged investments such as gold and if you can, real estate. Traditionally, a portfolio mix should consist of: