Why Cash Loses Value Over Time
Over the past 30 years, the value of money has significantly decreased. A study in the United States reveals that $1 today is worth only $0.47 when adjusted for inflation. This indicates that inflation has gradually eroded more than half the value of cash. Consequently, if someone simply holds onto their money without investing it, they would lose a substantial amount of purchasing power over time.
Source : Peter Mallouk
How Markets Can Beat Inflation
While cash has depreciated, the stock market has demonstrated the opposite trend. If that same $1 had been invested in the S&P 500 index, even during years with no returns—like from 2000 to 2010—it would now be worth approximately $19. This illustrates that, despite market fluctuations, investments can grow wealth over the long term. Fixed deposits in the U.S. have provided very low returns—sometimes as little as 0.5%—which has not been effective in beating inflation either.
The Situation in India
In India, fixed deposits also yield low returns. When factoring in inflation, the real value of these returns is nearly zero. Therefore, if someone keeps all their money in fixed deposits, their wealth may not grow at all. While it might help maintain the nominal value of their money, there is no real gain. To effectively grow wealth, some degree of risk is necessary.
Why Taking Some Risk Matters
To increase purchasing power, it’s essential to invest in assets like stocks or bonds. Even with minimal risk, allocating a portion of the portfolio to investments can help counter inflation. Keeping all money in cash without investing can lead to a gradual decline in financial health. A graphic shown in the study (see the image above) underscored this point: cash alone cannot help achieve long-term financial goals.
Everyone Faces Different Inflation
It is crucial to understand that inflation affects everyone differently. While the government may report inflation at 5%, the actual impact varies based on individual lifestyles. For example, individuals sending their children abroad for education or requiring medical care in old age may experience much higher inflation. Therefore, each person should tailor their financial planning to exceed their personal inflation levels.
Have you tailored your Financial planning? SHARE your experiences in the comments below! If you found this blog insightful, please share it with your friends!
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