You don’t spend all the money you earn. Right? It is partly spent and the rest is kept for meeting future expenses. Instead of keeping the money idle, you may like to use the money to get return on it in the future or to get the money to grow. This is called Investment.
Now let’s see Why one should Investment.
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. 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 was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years.
This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is the return after inflation. The aim of investments 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 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won’t buy as much today as they did last year.