Can you Multiply the number of apples you can afford over the years?

Well, if you are thinking what has an apple to do with financial planning, what is important is not “apples” but “to afford to buy more” apples as the time passes. This test would hold good not just with apples but also with anything ranging from a needle to a House property that has a monetary value. How does this work is what I propose to deal with in this article. As you go through, you will realise how important is Inflation to an investor and why is it important to consider inflation before picking up avenues of investment for parking your precious and hard earned wealth!

More than a decade back when I was just appearing for my 10^th grade in Schooling, I was very keen to know about the details of the investment advertisements of various kinds in leading newspapers. I use to chase my mother with the details such as “9.5 % returns” “Standard Chartered Bank deposits”, in the hope to persuade her to make accept some of my financial advice although it was more of an impulsive thought rather than an analysed one. As a very conservative family, She said : "Son, do you know that these are very risky instrument, and we cannot afford to lose any money at the end. The prices of Vegetables and other household items are rising and we have to be careful while making investment. What is the use if we cannot keep up with the shooting prices of vegetables and other utilities!" Same is the case with many of us who come across these advertisements. Probably there are many who have insufficient exposure to the way these investments grow. If you are one among them, do not stop till you have finished reading this entire article because this will throw some light on the meaning of “growth” of investments.

First and foremost, What is money? Money is not Wealth. Yes you heard it right!! Money is something that is used as a representation of wealth. This is because a term like wealth is more comprehensive which would cover financial as well as non financial aspects such as Food, Clothing and shelter, Medical and Educational needs. Can anyone eat money? Can anyone sit on money and go for a long drive – and the answer most obviously is no. Money can be used to buy these things which are necessary. So what is more important is to be able to afford these tangible things that support a human life. Now, Once you are clear with this concept of Money as a representation of wealth – most of the purpose of this communication seems to have been achieved.

The purpose of investment is to grow your wealth (Affordability of above mentioned tangible things). Now let me give an illustration to explain the investment: Let’s say you invested Rs. 100 at present for an year and make 10 % growth at the end of year. Does this mean your affordability has increased? Not necessarily. This decision cannot be taken in isolation from the element of inflation. For the affordability to increase there is a precondition here that the inflation rate be less than your investment return. If the apple that costed Rs. 10 is now costing Rs. 15, then this is how the picture would look like : The initial amount (Principal) of Rs. 100 that you invested would empower a purchasing power of 10 apples on you. At present the “apparently” grown investment worth (Amount) Rs 110 would give you a purchasing power of only 110/15=7.33, i.e. less than 8 apples. So you can see that actually your investment value has declined. If an year down the line, still you would have been able to buy same number of apples with the Amount, you have neither gained nor lost anything with respect to your investments. Work out the future affordability of money before you invest and make sure you afford more than today and that is precisely what growth would mean to me.