The simplest way to calculate this is by using Rule number 70. And that is, Shweta Jain, certified financial planner, founder, Investography, and author, My Conversations with Money, said, is a method that helps one estimate when the value of money will halve. If inflation is 7% the value of money will halve to 70/7% that is in ten years.
Renu Maheshwari, CEO and principal adviser, Finscholarz Wealth Managers, explains it even further. She added a lot of us use the rule of 72 or 70 or 69 to calculate the doubling time of our portfolio. This rule gives an easy ready reckoner to use method to calculate the time it will take to double the money, given a certain rate of return. Rule of 70 is the easiest to use and rule of 69 most accurate.
The same concept can also be used to measure how inflation can erode the value of your rupee. If the inflation rate went up from 2.5% to present 7% how has it affected the erosion of your money?
With inflation of 2.5% (inflation rate in 2017) the value of money would be reduced to half in 28 years ( i.e. 70 divided by 2.5) but with an inflation of 7.7 % (current) the value of money will be halved in about 9 years ( 70 divided by 7.7 ). And if we were to go back to the double-digit inflation era of 2010 (an inflation rate of 12%); the money was eroding to half its value in about 6 years (70 divided by 12).
Now imagine the situation of all those retirees who retired in the 1990s with an annual average of 10% of inflation, the money was being halved every 7 years, Maheswari exclaimed. And if the money was parked in bank fixed deposits for the regular income they were losing money in nominal terms too.
How do you safeguard the purchasing power of your wealth in the high inflation era?
Answering this, Jain said, we need to invest smartly to ensure that our investments can beat inflation and we don't lose its value.
Maheswari suggested, stay away from fixed deposits kind of investments. The assets to look for are real assets and growth assets i.e. companies or businesses i.e. equity, gold, and real estate.
Equity and real estate give superior returns as compared to gold over a long period, because of the growth factor. Be careful about asset allocation while investing in real estate. It should not go above one-third of the total assets. Equity can be invested based on company prospects or a portfolio of shares through mutual funds.
"While debt investments/fixed income instruments are good for safety and liquidity. A part of the investments have to be in growth so one can beat inflation," concludes Jain.