Tag Archives: Financial Goals

Impact of Demonetization on Individual’s Financial Goals

 

As recommended in my first blog ‘Impact on individuals with this MODIfied India’ in this series ‘Impact of Demonetization on Personal Finance’; the stock market did witness a panic selling on 9th Nov. All those, who had heeded to the advice on buying in that fall, would be sitting on around 20%-30% profit by the end of the day, if invested in fundamentally strong stocks.

Since the Demonetization, a lot has been said and written about the impact of Demonetization on Economy. In today’s blog let’s try to understand the impact of this decision on Financial Goals of an individual.

One of the biggest impacts, that Demonetization is going to have, is that it shall weed out considerable amount of Black Money from the system. One of the bye-products of Black Money is high Inflation. With this cleaning up of the system, inflation is expected to drop considerably. In fact, we might even witness deflation for some time due to this, however, in medium to long term, the inflation shall be tamed.

One of the important factors impacting the financial goal is the rate of inflation. For a goal that is farther away, minor change in the inflation could lead to major fluctuation in the goal amount. Let us take the example of our old friend, Amit, who is now married and have a kid. Amit’s dream has been, to send his kid to a reputed college for a professional course. The current cost of the course is ₹25 Lacs, and the kid is expected to go for this course after 21 years. Assuming an inflation of 8% the cost of this course is going to be close to ₹1.26 Cr after 21 years. The following table depicts the difference in the end amount with various inflation rates.

Current cost of course ₹    25,00,000
Number of years to achieve the goal 21
Rate of Inflation 8% 7% 6% 5% 4% 3%
Cost after 21 years ₹ 1,25,84,584 ₹ 1,03,51,406 ₹ 84,98,909 ₹ 69,64,906 ₹ 56,96,920 ₹ 46,50,736
Difference when compared to 8% base ₹    22,33,178 ₹ 40,85,675 ₹ 56,19,678 ₹ 68,87,664 ₹ 79,33,848
Percentage saving compared to 8% base 17.75% 32.47% 44.66% 54.73% 63.04%

From the above table it is evident that the savings could be as high as 63% if the inflation drops by 5%. Even a 1% drop results in a saving of close to 18% in the amount needed at the time of admission. Amit shall thus be able to attain the goal by investing much lesser amount than he envisioned at the beginning.

However, the things are not completely rosy as the rate of return on some asset classes is expected to come down as well. To understand this, stay tuned for the next blog in the series – ‘Optimizing returns in lower interest regime due to demonetization’

Should you have any query related to any of your goals or above views, feel free to leave a comment.

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