Personal Finance Blog India –

Negative Compounding:

Rajesh has nearly 5 lakh idle in his bank account..neither he don’t have any plan about this money.Currently his money is subject to interest rate 0f 4% and though numerically money is growing… the purchasing value of money is going down year by year considering the inflation effect..

If we consider period of last 10 years,costs have at least tripled.E.g cost of tea in better hotel was Five Rupees 10 years ago and it is more than 15 Rupees now and its true for nearly every thing.So inflation rate is more than 8% for last 10 year..

Today we will look at the value remained idle in saving account over a period of last 10 years against the actual time value & if positive returns achieved @10% annually.

Look at the following chart:

Purple  Line : Shows how purchasing power of Rs.5 Lakh will go on decreasing year to year due to inflation effect.Net effect of saving rate & inflation rate is considered.After 10 years purchasing power of 5 lakh will be reduced to 3,32,416 if money remained in saving account.

Purple line shows net effect of saving rate & inflation rate .Net rate is negative.

One can check the end value difference between red line & Blue line..the difference i is growing with time and its due to negative compounding the money in saving account is facing...

Category: Fixed Income


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