If you have a less than 20:20 vision, you know how it all happens. At some point in time you realise you are seeing things less clearly. You visit an eye clinic, get your vision tested and corrected with the help of spectacles or contact lenses. Every once in a while you feel the need for further correction in your vision.
You visit an optometrist and change your lenses. But have you considered that there’s more to vision than good eyesight? We all have a vision (however imprecise) of how prosperous we want to be in future. This too needs periodic correction, particularly in times like these, when the inflation rate is high. Whether you see it or not, inflation has blurred your financial goals—often going even beyond the bounds of imagination. That’s because though everybody is concerned about inflation, very few really understand it, and fewer do anything to fight it.
For instance, how many of us know that inflation doesn’t actually destroy our wealth? It redistributes it—somebody’s high price is somebody else’s high income. Once you understand this, you can actually play the re-distribution game in such a way that inflation increases your income more than your expenses. The beast of inflation can be turned into a beauty if you understand it, fight it and conquer it.
Here’s something else you might not be aware of: your income will need to grow faster than 15% to neutralise the impact of a 10% inflation rate. The key word here is “neutralise”— a 15% (14.9% to be precise) growth in income will just protect your income from 10% inflation. For your real income (purchasing power) to grow, you will have to earn more than 15% a year. If you haven’t understood why your income needs to grow faster than the rate of inflation, your wealth vision isn’t perfect. The factor you are ignoring is taxation.
The highest rate of income tax in India is 33%, including surcharges. Assuming you are in the highest tax bracket and inflation is 10%, the neutralising rate of income growth works out to be 10% / (100% - 33%) = 14.9%. No wonder, inflation is called a super tax; Nobel laureate Milton Friedman called it “taxation without legislation”. Our comprehensive cover feature on inflation (pgs 38-63) examines this phenomenon and suggests several wealth vision tests—complete with prescriptions for vision correction.
