All of us are worry about inflation. Inflation can not only raise the cost but also able to drag down your living standard to pit holes. In a best investment plan or financial plan, a financial adviser or an investment consultant should be able to calculate the future possible inflation rates and advise investments that able to beat inflation as well as provide inflation adjusted returns to his or her client after certain years.
As an individual, we should have well idea about how calculate our inflation adjusted expense in the future. If the present expense is 10,000 per month in any currency with present inflation rates but, in the future, say after 15 or 20 years, an expected inflation of 5% or 7%, then how can you calculate the amount required to bear each months expenses at that time?
Here is a simple but very effective calculation method that you can use to identify the total amount you required each month after 20 years and expected inflation rate is 7%.
The formula for the same is =Present Amount*(1+inflation%)^Number of Years
To simplify the same, you have a present monthly expense is 25,000 and after 20 years, say the expected inflation rate is 7%, then what will be the amount you required per month after said 20 years? Calculate like this:
=25000*(1+7%)^20 (You can use and MS Excel sheet to easily calculate this)
This will give you a horrible amount of 96742.11 required each month after 20 years to bear your monthly expenses if the inflation rate is 7%. If the inflation rate is 5%, then you will get a consolidated amount of 66332.44 as well.
Simple to calculate isn’t it?
Remember you have to identify the rate of inflation you are expecting after several years. This is an important point to consider when dealing with financial planning . All the investments should park with proper instruments with balanced why to beat inflation. To do this, you should be able to calculate the expected inflation % and required inflation adjusted returns after your intended years by comparing the amount for your present monthly expenses. This formula can help you to identify the later i.e. the amount you required after intended years by comparing your present monthly expense amount.
As a bonus, below are some of the instruments you can consider to park your investment amounts to beat the inflation as well as get the inflation adjusted return in a long run.
1. Gold – Coins, Bars, ETF, Investing on gold companies and funds
2. Real Estate – In the form of residential or commercial property, real estate funds etc..
3. Equity investments: In the form of Direct stock investments, high growth equity mutual funds, ETF i.e. Exchange Traded Funds, Index funds
4. International equity exposure: Have a reasonable international equity exposure by subscribing good mutual funds who investing to international stocks especially to the growing economies.Below are the instruments never give you inflation adjusted returns. In a simple word, they are flop when inflation is in the subject:1. Bank FD’s
2. Debt funds
3. Post office savings schemes
4. Traditional insurance Plans
As a thumb rule, if you plan to add instruments that you expecting to beat inflation in the future, never give major portion for debt instruments. Instead, go ahead with the instruments I mentioned first, that can beat inflation.
Sherin Dev is the founder and editor if Investinternals.com Blog. Learn more about him here. Follow him on Twitter @Moneyhacker or be in touch with him at Facebook
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