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Making the future easy

Appreciating the long-term impact of inflation is difficult, but necessary

Making the future easy

One of the strange things that came to the forefront during demonetisation was that a lot of people think that storing cash is a form of saving. Almost all of us know of at least a few cases where someone--often a housewife or an older person--had stored large amounts of cash as savings. I personally came across two such cases where the amount thus saved was several lakhs of rupees. Notably, this was not black money. The source of the money was legitimate, tax-paid, salary income which someone had just squirrelled away, slowly and steadily, over the years.

As far as the saving impulse goes, this was exemplary behaviour. It takes a really strong motivation to not spend money when it is so readily available at hand. However, beyond that, as far as the actual mode of saving goes, this is obviously the worst thing to do. All these people were just throwing away money. Because of the relentless rise of prices, some five to ten per cent of the money is just wasted away every year. Over a decade, the money was perhaps just half of what it would have been.

And yet, it's hard to actually blame these people. In the mental model that they have, their money remains the same while things get a little expensive. None of them could be expected to understand the compounding effect of inflation. The funny thing is that even many of the people who don't store cash and use the formal financial system don't actually appreciate accelerating impact that this compounding effect has. Most of us remember how little things used to cost in the past--how a family of four with an income of Rs 10,000 a month was comfortably middle class 30 years ago. However, it's future impact that's hard to appreciate. In 2050, a family of four will need perhaps Rs 10 lakh a month to have a middle-class existence.

That sounds kind of OK because after all, one can expect people's salaries to also rise at an equal rate. After all, despite the fact that the monthly cost of a middle-class urban existence has risen from Rs 10,000 to Rs 1 lakh per family, the fact is that a lot more people are prosperous today. And I definitely believe that this will continue and that many more Indians will be prosperous in 2050 compared to the present times.

However, I'm not so optimistic about people who will be retiring. If you are 45 today, then in 2050, when you will be 75, you will not be earning more than today. In a way, you will not be earning anything because you will be living on the investment returns that are coming out of money that you are earning today, and hopefully, saving. The question is, will that be enough? Will the savings made in today's world be enough to sustain us in 2050? Or in 10, 20 years beyond that? That's a question we must ask--and answer--today.

Let's look at the numbers. If today, Rs 2 crore sounds like the kind of money you'll want twenty years from now then you'll actually need to have about Rs 10 crore. If you work backwards from there, you'll need to save about Rs 1.7 lakh a month if the returns are 8 per cent. And if the returns are 10 per cent, then you will need to save a lot less--Rs 1.3 lakh a month.

Think carefully about this. People who are relying on deposit-type savings which yield very little real (above inflation rate) rates of return need to save a lot more in order to avoid old age hardship. All of us who don't have some inherently inflation-adjusted old-age income (like rentable property) need to understand this maths and act upon it before it's too late. This may not look urgent--you can always postpone it to another day--but it's definitely more important than whatever else you are planning to do next weekend.