The cost of living is simply what it costs to buy the goods and services you need to live. The rate at which the cost of living increases is called inflation. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there is 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. It is very important to consider inflation as a factor in any long-term investment strategy.
Why to invest?
• One needs to invest surplus money to take care of uncertain future by keeping inflation as one of the factors.
• To earn a return on your idle resources.
• To generate a specified sum of money for a specific goal in life.
Remember to look at an investment's 'real' rate of return, which is the return after inflation. The ultimate aim of an investment should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 5%, then the investment will need to earn more than 5% to ensure it increases in value. One needs to remove tax component on maturity value. If it is less than 5% after tax, then the value of the investment is decreased. One has to understand that the matured amount won't buy as much as they bought at the time of investment.
When to Invest?
The sooner one starts investing is the better. By investing early, One can allow investments more time to grow, whereby the concept of compounding increases the value of investments, by accumulating the principal and the interest or dividend earned on it, on yearly basis. The three golden rules for all investors are: