Lot of people don’t understand how inflation eats into their money. They ask “Why don’t I keep it in a safe in my house? Or hide it cleverly under some tiles or a book I scrape out the inside? It will be very safe right?”
It will be very safe from the robbers who are going to break into your house. But it is not safe from the robber hiding inside your house – inflation. Locked doors or clever book safes don’t stop it.
Every year he takes out some of your money never to be seen again. To better understand it think of what a rupee note denotes. The paper note doesn’t have any value by itself. It’s what you could buy with it that gives that paper the value. If you could buy a pen for Rs.10, that’s what is the value of the 10 Rupee note.
Lets go back to 1984 for a minute. Imagine you living in the 80s and you having Rs. 1,00,000 in cash with you. What could you buy with Rs. 1 lakh then? You could buy a piece (more than 1000 Sq.Ft.) of land in a great location inside the city limits.
Now back to 2014, imagine you have the same Rs.1,00,000 cash with you and I ask you to buy the same land. How much of the land will you be able to buy (assuming the seller is ready to divide it into as small a piece as possible)? It would be a miracle if you could even buy 1 Square Feet of the land with the Rs.1 lakh.
Now what happened? You were having the same Rs.1,00,000 in both the examples. You were able to buy more than 1000 square feet of land in a great location inside the city. But if you had instead kept the 1 lakh as cash in your safe for 30 years and now you took it out to buy land, you would be able to buy less than 1 square feet of the same land. Since no one can/will sell 1 square feet of land we have to go miles outside the city limit and to buy a similar priced land.
This example is applicable if you wanted to buy anything – be it gold, food, petrol, dresses, etc. Now imagine you doing the same mistake of keeping Rs. 1 lakh in a safe and taking it out after 30 years to buy something. It would be close to impossible to buy whatever you want to buy.
This is what inflation does to your money in hand. Remember this, the next time you have excess money lying unused in your bank account.