How to Get Rich Happily from stock market – #Short 3
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Inflation IS the steady rise of prices for goods and services over a period has many effects, good and bad.
Inflation erodes purchasing power or how much of something can be purchased with currency. Hence, it makes achieving financial freedom very difficult.
Because inflation erodes the value of cash, it encourages consumers to spend and stock up on items that are slower to lose value.
It lowers the cost of borrowing and reduces unemployment.
Then there is hyperinflation, which is often described as a period of inflation of 50% or more per month. The most infamous example is the German Weimar Republic in the early 1920s. Money flooded the economy and its value fell to the point where people needed wheelbarrows of cash to buy a loaf of bread.
Are Investments Affected by Inflation?
They sure are. As inflation rises and falls, three notable effects are observed.
First, inflation reduces the real rate of return on investments. So, if an investment earned 6 percent for a 12-month period, and inflation averaged 1.5 percent over that time, the investment’s real rate of return would have been 4.5 percent. If taxes are considered, the real rate of return may be reduced even further.4
Second, inflation puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer and fewer goods. As a result, you go far away from the goal of financial freedom.
If you want to overcome the trap of inflation then you need to invest in stocks, mutual funds or other equity investments that grows at higher rate than inflation. If you invest in stocks, you get dividends and the dividend return of good shares grow faster than the inflation rate.