Inflation ( Purchasing power of Money) Cycle

Inflation - Purchasing power of Money, Time value of Money
Interest - Opportunity Cost

Power of Compounding

One of the basic premises of investing is that your
money multiplies manifold over time. And this multiplication of money
is normally referred to as the "Power of Compounding".

The 'Rule of 72' is an easy way to find out in how many years your money will double at a given interest rate. Lost?

Suppose the interest rate is 15%,
then your money will double in 72/15=
4.8 years.

In case, the interest rate is 20%, then the money will
double in 3.6 years.


When Inflation rises, Borrower and Investor have a distinct advantage.

• Borrower rushes to borrow more to spend now
• while Investor smells higher profit from its business.
• Saver knows that he is at the receiving end and insists on higher Interest Rate, reestablishing the balance.

Inflation is detrimental to Saver but favourable to Borrower and Investor.
Saver demands interest for postponing his consumption while BorrowerInvestor have to pay up Interest for using Saver's surplus.


Save for a rainy day. But what follows, as a natural corollary is that to protect your savings against inflation you must invest it in some asset that will earn you returns. Be they shares, debentures, bonds, gold or even real estate.

1. # Savings is the difference between Income and Expenditure
2. # You must save for a rainy day
3. # Savings have no 'form' and must be protected from Inflation
4. # When you invest your savings it has morphed into Risk Capital
5. # Risk Capital can be eroded
6. # Risk can be minimized by choosing to invest in low risk investments
7. # The risk associated with each investment changes with time, and must be monitored carefully.

Due to Risk and Inflation, a rupee today is worth more than a rupee tomorrow on the time line.

It simply means that the LONGER you stay invested the MORE you make.

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