The Wealth Illusion: How to Get Out of Wealth Illusion?

What is wealth illusion?

The people who don’t think of “Financial Management” seriously are likely to have wealth illusion. The question now is “what is wealth illusion?” The wealth illusion can be defined as the state where the person thinks he/she has more wealth than he/she actually have. How is it possible? We will discuss it in detail in the next sections of this article.

What causes wealth illusion?

There is one major cause that creates wealth illusion, and i.e. inflation. You must be aware of the rate of inflation of the nation. A rupee in hand today is worth more than a rupee in hand tomorrow. This is a fact. If you’re thinking that storing your money in your closet will increase your purchasing power, then you’re wrong. The rate of inflation will gradually decrease the value of money you own.

Let’s suppose you save $5,000 every month, and you store it in your closet. In the current scenario, you can purchase an apartment for $200,000, and the rate of inflation in your nation is 10%. After a year, you will have $60,000 in your closet. However, the present value of that $60,000 is just $54,312.75 after adjusting the rate of inflation.

Many people don’t consider the inflation factor, and this is the reason they have wealth illusion. You need to invest your money to consistently increase your purchasing power. In the next section of this article, you will get to know the ways to increase your purchasing power.  

I’m aware of wealth illusion now; please tell me the ways to consistently increase my purchasing power…

The first thing you need to do is to check the inflation rate in the nation. After checking out the rate of inflation in your nation, you need to search for the options to invest. Some people want to take the risk; some people want to avoid the risk. It depends upon the nature of the person. In order to make an investment, you need to take some risk. However, the good thing is that the degree of risk varies a lot.

Here are some of the options available for you to invest.

1. Deposit your money in the bank

It is the safest form of investment. However, you need to make sure that the interest rate of the bank is higher than the rate of inflation. All the banks are strictly regulated by the central bank, and you don’t need to worry a lot about the risk of losing your money.

2. Bonds or Preferred Shares

There are many organizations who issue bonds and preferred shares. They provide a decent interest on your money, and it has a minimum risk factor.

3. Common Stocks

The third option for you is to invest your money in the common stock. It is a very risky option for investment. You need knowledge, skills, and experience to invest your money in the common stock. Because this option is a very risky option of investment, it has the potential to provide a higher rate of return as well.

There are many other options of investments in addition to these options. I’ve just mentioned some of the basic options of investment for the beginners. I hope this article is simple enough to make you understand the concept of “wealth illusion”.