HOW TO SAVE YOURSELF FROM ESCALATING PRICES

Price raises and hence salary is raised. (DA- dearness allowance for commodities getting dearer). More money flows and price again shoots up. The salary is pushed up again. This is a vicious circle in economics. It cannot be eliminated. A small amount (2-3%) money inflation is welcome. It has a number of positive effects. In India, in the last 30 years, salary has gone from a thousand rupees to more than a lakh. The house rent has gone from a few hundred rupees to more than ten thousand rupees.

In India, the average inflation rate per year is 5%-7%.
Suppose your house rent is 7000 INR now. What will be the rent after 5 years, taking inflation at 6%? There is a simple formula.

Price after n years = price now*(1+r)^n

r- rate of inflation in decimal form

Rent after 5 years = 7000*(1+.06)^5 =9368/-

6% = 0.06 = rate of inflation, we get INR 9368 as rent after 5 years. After 10 years, the rent will be 12536/-. This is an exponential function. Hence the price grows rapidly with years.

Hence renting a house is not advisable (generally). (1) you can lease a house (2) Buy a house (3) Get a bank loan and purchase or construct a house. The third one is suitable for many. We pay EMI (equated monthly installment) for the bank loan. The EMI remains fixed over the years. Hence the inflation is taken care of. If the EMI is more or less equal to the house rent, go for own house and EMI. Here is the simple formula to calculate EMI.

EMI = L*C/1-(1+C) ^-n
L- loan amount
C = r/12, r-interest rate expressed in decimal form.
n- the number of monthly payments.

How to tame inflation beast?
1. Buy or lease a product or asset at once.
2. Go for a bank loan with EMI (should be affordable)
3. Saving money and buying things, may not be advisable. Since you may not catch up with the price rise. Even if you want to buy gold for the wedding, buy gold directly every month in small quantities. (Today, you can buy e-gold in milligrams on-line)
4. Close high-interest loans one by one.
5. Arrange for comfortable income in the retirement period. It should cover up inflation.

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