Samosa Economics – Your guide to Inflation
Have you ever been explained the concept of inflation through samosas? Of all the ‘layman’ explanations about inflation that I have read over the years, the example given by master investor, Ajit Dayal, has been something I have never forgotten. In a 2008 article, he explained,
“In 1980, it probably cost you Re 1 to buy one samosa. Today, (2008) it costs you Rs. 10. Has the samosa become 10 times larger over the past 27 years? Not at all. The fact is that Indian rupee has lost value over the past 27 years, so the samosawala wants more of your rupee to sell you the same samosa. Money, obviously, buys less these days. Paper money has lost value. That is what is called inflation.”
This inflation in the cost of the samosa has increased even more since he gave this explanation in 2008. Today, the price is almost Rs. 20 for a samosa, which shows an increase of 100% from Rs. 10 in 2008.
Most of us do not factor in inflation when we plan our finances. The Rs. 15 samosa will never cost Rs. 15 again; it will only become more expensive. Despite the prevalent and unavoidable nature of inflation, it is something that most of us overlook. It is that blind spot which causes most investment accidents. It is that costly overlook due to which investors often fall short of achieving their financial goals – by a mile.
Consider this, most people who plan and budget their finances, have a long-term outlook; be it a college education for our kids, retirement allocation for ourselves and our spouses, or planning for contingency health-care expenses. These goals are for the future, and thus there is more reason to review these goals constantly and correctly adjust for inflation.
Sometimes, even factoring inflation is not enough. Inflation differs from one commodity/service to another. Inflation on leisure and entertainment industry may differ from inflation on daily consumables. Inflation on education will differ from inflation in medicines and healthcare services. Thus, for a person who has not accounted for inflation or has kept a single arbitrary estimate for inflation, the road will be very tough. Since it is difficult to guess and factor in inflation into all your goals, the idea is to improve the guessing process.
As Carl Richards the Guru of Behaviour Gap, writes:
“For almost every other financial goal that is years away, it’s important to understand that things will change. No matter how much time we spend creating a plan it can’t capture everything about our future reality. All we’re trying to do is make the best guess we can and move on. If you understand that these are guesses (very important guesses), then you can give yourself permission to not obsess over them. Make the best guess you can with the information you have, and then commit to revisit it often enough to make course corrections long before you veer too far off course.
The other wonderful thing that will happen is that often we find out that even though our perception of our future financial needs was not even close to reality, we gain a sense of control that helps us focus on living our lives NOW. In many cases, we learn that we do have enough money and time to meet our goals. It might not even be a situation of needing to grit our teeth and save more, but we never know until we take the time to plan!”
So, the idea, is to (keep your eye on the cost of the samosa):
- Plan and put down your goals on a piece of paper
- Get obsessed with your goals
- Keep a hawkish eye on the cost of your goal year on year
- Be agile and course correct so that there are no nasty surprises when the goals do come up
Team HF
Happyness Factory is a Goal Based Planning platform. We aim to spread financial literacy and help people make sound financial decisions.
26 Feb, 2018