#Financial-Planning  #Investment  #Saving  #Finance 

2.1 Inflation

  • Inflation is the decline of purchasing power of a given currency over time
  • Means purchasing power of same amount fo money 💰 decreases over time

What is Inflation? How does the printing of money 💰 affect Inflation?

  • With high liquidity in the market the spending power of person increases
  • That leads to the high demand for goods but supply remains the same.
  • With high demand price of goods increases

T0 beat inflation

  • Rate of return(RR) > Inflation rate(IR)
  • If RR < IR –> then Your money will start eating Itself

Inflation Effect on Investment

  • Actual return = Investment Return - Inflation
* If:
  * Return Rate = 10%
  * Inflation Rate = 12%
    
  * Then, Loss = 10% - 12% = 2%
      * Because of higher inflation your main is degrading over time.

2.2 Interest type

Rules of Compounding

Rule of 72 (Doubling)

  • It tells number of years required to double(2X) your principle

Years = 72/rate

* If rate = 12%
    * 72/12 = 6 yrs 
* If rate = 10%
    * 72/10 = 7.2 yrs

Rule of 114 (Triple)

  • It tells the number of years required to triple(3X) your principle

Years = 114/rate

* If rate = 12%
    * 114/12 = 9.5 yrs
* If rate = 10%
    * 114/10 = 14 yrs

Rule of 144(4 times)

  • It tells the number of years required to 4X your principle

Years = 144/rate

* If rate = 12%
    * 144/12 = 12 yrs
* If rate = 10%
    * 144/10 = 14.4 yrs

Rule of 70

  • It tells numbers of years required to reduce the value of principle to Half

Years = 70/rate

* If the inflation rate is 7%
    * 70/7 = 10 yrs
    * So in 10 yrs principle value will be Half

Gayan

  • Avoid long-term FD: Most probably your FD may not beat the inflation rate.

Reference