Have you started investing for long-term goals without taking into account the impact of inflation? You could be in for a rude shock a few years down the road. Some of the daily-use or specific items may not witness big-time inflation but long-term goals such as children’s education and your own grocery bills may see a huge jump several years down the road.
How much to save monthly for your goals such as retirement, buying a house or for children’s education? If you are looking for answer to these, take into account the impact of inflation in your calculations.
Sending your kids for higher studies costs a few lakhs and with inflation, the budget keeps increasing year-on-year. Medical and education inflation is known to rise slightly more than the general inflation in the country. Therefore, if you are religiously saving towards long-term goals, it’s always better to save an amount after factoring in inflation and not save only towards the current cost of the goal.
Your goals are moving targets and the more distant they are, the more uncertain is the amount. What kind of educational courses will emerge over the next decade or how costly will the residential property be in a few years time is all subject to the increasing prices. Keeping a buffer or even making a conservative estimate will help you avoid any shortfall at the time of realizing the dream.
Consider this – Have a look at your household budget two decades back in early 2000 and compare it with the monthly household expenses now in the 2020s. They would have changed a lot. So, if your current household expenses are around Rs 50,000, will it remain the same when you retire?
Therefore, if you are saving for your children’s goals, home buying or your own retirement, take stock of inflation and then start saving.
Not saving right amount
You could be investing Rs 10000 or Rs 20000 a month through SIP, but still it could not be the right amount to save unless you have factored in inflation. The shortfall could be huge especially when the goal is at a distance.
A goal that costs Rs 21 lakh at today’s cost would make you shell out nearly Rs 50 lakh after 18 years at an assumed inflation of 5 percent. Thereafter, one has to invest to accumulate the inflated amount and not what it costs today.
Similarly, if you are planning to save for retirement, first consider your monthly expenses at current costs and then assuming an inflation rate of about 5 percent inflate them for the number of years left for you to retire.
If a child’s education, for which money is required after 15 years, costs Rs 10 lakh today, the cost will shoot up to about Rs 20 lakh at an inflation of just 5 per cent.
So, at an assumed growth of 12 per cent annually, if you save Rs 2000 a month, you would create about Rs 10 lakh but the inflated cost of the goal would have been Rs 20 lakh for which you should have saved Rs 4000.
The short fall
By not investing not the right amount, you may have to borrow from others to meet the shortfall.
If you save just Rs 2000 a month less for your desired goal, after 15 years there could be a shortfall of nearly Rs 10 lakh, assuming the investment grows at 12 per cent per annum.
If you save just Rs 5000 a month less for your desired goal, after 15 years there could be a shortfall of nearly Rs 25 lakh, assuming the investment grows at 12 per cent per annum.
If you save just Rs 2000 a month less for your desired goal, after 30 years there could be a shortfall of nearly Rs 70 lakh, assuming the investment grows at 12 per cent per annum.
6-steps to save for goals
Step 1: Identify the long term goals
Step 2: Estimate when will you require the funds
Step 3: Find out what do they cost today
Step 4: Inflate the cost by a conservative inflation estimate of 5 per cent
Step 5: Find the inflation cost after factoring number of years left and inflation
Step 6: Start saving regularly towards the inflated amount
You have to tackle the situation by either increasing the amount of saving or increasing the returns on your investments. A balance between the two is best recommended as going for higher return may put your savings to higher risk. What comes to the rescue is the increase in income during these years. However, as inflation eats into the purchasing power of rupee, your increased income is also subject to the effect of rising prices. Therefore, without calculating the right amount of monthly savings required, one should not start to save to avoid under-investing.