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The Inflation SavingsInvestment Equation How Life Insurance Plans Help?

  3/13/23 6:40 AM

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A penny saved is a penny earned. But owing to inflation in the economy, the value of the penny saved could be much lesser than when it was earned and saved. Inflation has a corrosive impact on our savings and investments. Therefore it becomes essential to understand the effects of inflation on savings and investments. Even more important is to invest in savings and investment plans that can help you keep the inflationary effects on your income in check.

Before Looking at Life Insurance Savings Plans, Lets’ Look at Inflation!

What is Inflation?

Inflation means an increase in the price of goods and services, resulting in a decline in the purchasing power of money. Remember the cost of movie tickets 10 years ago? The cost is much higher today, and it is because of inflation. Likewise, we can say that with 2% inflation, a bar of chocolate that cost you INR 100 today will cost you INR 102 in the next year.

How Inflation Impacts Your Savings and Investments?

Every rise in prices is affecting your cost of living, leaving a dent in your savings and investments. The reason is, with the rise in inflation, the amount you save or invest from your income every month may not rise at the same rate. Therefore, the rise in price puts extra pressure on your savings and investments. Due to the effect of inflation, after a few years, the amount you have saved will fetch you a lesser number of goods.

Example of Impact of Inflation on Savings and Investments

Suppose you have INR 1,000 in your savings account today. The interest you earn on your savings is say 5%. Therefore, after a year, you will have INR 1,050 in your account. Now let’s say, during this period, the rate of inflation is 10%. This means that the price of a particular commodity, which is INR 1,000 now, will be increased to INR 1,100 next year. Now, even if your investments will grow by 5%, but the commodity price will grow by 10%. This leads to a negative rate of return, or we can say that you will have to shell out more than what you will have at your disposal. Thus, inflation reduces your purchasing power and eats away your real return on savings and investments.

After understanding the impact of inflation, let us see how to beat the impact of inflation with tax saving investment plans Protect your savings: Invest in Life Insurance Savings Plans

To overcome the inflation, you must invest in financial products like tax saving schemes in India and myriad savings plans that give you a higher rate of return as compared to the rate of inflation. Some of the investment options are investing in stocks, mutual funds, bonds, property, gold, systematic investment plans (SIPs), life insurance, etc. to name a few. Such investments will grow your savings and provide you hedge against inflation.

At Edelweiss Life, we provide insurance products that not only provide you safety and security but also act as a wonderful investment avenue. In case you are unsure about the type of insurance plan, you can consult with our financial experts who will throw light on the different options that are suitable for you.

Impact of Inflation on Your Savings & Investment

Inflation can have a significant impact on your savings and investments. Here are some ways it can affect them:

  • Decreased purchasing power: Inflation causes the value of money to decrease over time. This means that the same amount of money you have saved or invested will buy fewer goods and services in the future. As a result, your purchasing power will decrease.
  • Decreased value of bonds: Inflation can cause the value of fixed-income investments, such as bonds, to decrease. This is because the fixed interest payments from these investments will be worth less in the future due to inflation. This can lead to a decrease in the market value of the bonds.
  • Increased interest rates: In order to combat inflation, central banks may raise interest rates. This can have a negative impact on investments such as stocks, as higher interest rates can make it more expensive for companies to borrow money, which can reduce their profitability and stock prices.
  • Increased returns on certain investments: While inflation can have a negative impact on some investments, it can also have a positive impact on others. For example, real estate and commodities such as gold and oil may benefit from inflation as their values tend to rise with inflation.

Overall, it is important to consider the impact of inflation when making savings and investment decisions. Investing in a diverse portfolio of assets can help to mitigate the impact of inflation on your savings and investments.

How to Reduce the Impact of Inflation on Your Savings?

To minimize the impact of inflation on your money, it is recommended to invest in asset classes that provide inflation-beating returns. However, investments that barely beat inflation may not be suitable for those seeking to generate wealth. Below are some investment options that can help you beat inflation:

  • Gold: Gold is often considered a reliable hedge against inflation, as its value tends to increase when the purchasing power of currency decreases. However, investing in gold also has opportunity costs. When inflation is high and interest rates are increased, the opportunity cost of holding gold also rises. Additionally, storing large amounts of physical gold can be risky and costly.
  • Real Estate: Real estate is an illiquid investment that is best suited for long-term investors. Although it has been a promising sector for the last few decades, several factors, such as location, transportation, infrastructure, industry, and government policies, can affect property values. It may also be difficult to sell or rent out a property in times of financial need.
  • Equity: Investing in stocks can help generate wealth, especially for young investors. Equity-linked savings schemes (ELSS) offer tax benefits, as investments in them are deductible from taxable income under section 80C. However, returns are not exempt from tax. Unit-linked insurance plans (ULIPs) are another option that provide tax benefits on investments and are exempt from tax on maturity.

It is important to consider the impact of inflation on your future standard of living before investing or saving for tomorrow. You can seek the help of an expert or use an online inflation calculator to calculate the additional figure for inflation and include it in your long-term financial goals. This will help ensure that your investments and savings are sufficient to meet your future needs and maintain your purchasing power over time. 


Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.

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