Inflation rose worldwide; Surely you have also felt the effects of rising costs. High inflation decreases the value of the money you save. Your personal inflation rate may be much higher than the average consumer inflation rate of 8%. Even though moderate levels of inflation benefit the economy, high inflation not only hurts you as a consumer, but also as an investor. According to experts, inflation will remain high for some time.
Here are some tips to counter the impact of inflation on your finances:
1. Calculate your personal inflation rate: This can be done by comparing your regular expenses between two periods. You can also use many expense management tools available today. Consumer inflation is a total figure that represents the average of the different categories of expenditure. For example, while food inflation is between 11 and 14%, rent inflation is lower. These distinctions highlight how important it is for you to understand how rising prices affect you.
2. Reduce expenses: Inflation is a very strong reason to cut unimportant expenses. Analyze your spending by reviewing your bank or credit card statements.
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You can also apply one of the popular mental frameworks or budgeting strategies such as the 50:30:30 rule where you spend 50% on needs, 30% on wants, and save 20%, or zero-based budgeting where you list all your expenses and subtract them from your income, which helps you prioritize. There are also other frameworks to help you get started in a structured way.
3. Invest in assets that offer clear, positive and real returns: Real returns are achieved when you subtract the rate of inflation from your stated savings. While FDs are giving negative returns at the moment, some of your other investments might do the same as well. To ensure that your returns are healthy, it is important to renew your investments regularly.
4. Not all investments are equally affected by high inflation: To control inflation, central banks raise interest rates which affect companies and sectors differently. Be careful when investing in stocks/companies that depend on a regular injection of capital for their business model. For example, equipment leasing/rental businesses that constantly require the purchase of new equipment, etc. When prices rise, sales of certain goods and brands decline. Companies with a good brand image are best equipped to maintain sales at higher prices.
Leveraged companies, i.e. companies that take on debt, are likely to experience an increase in debt servicing costs, which impacts their profitability. Some companies may choose to reduce their debt at times that affect their future growth prospects.
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It is important for bond investors to keep in mind that bond prices and interest rates are inversely related. Each type of debt instrument is affected by rising interest rates; but it is debts of medium to long duration that are harder hit than shorter ones. This is due to the very low price fluctuation of short-term instruments. Thus, debt instruments that are invested over a shorter period perform better with rising interest rates, while medium- or long-term instruments experience a price correction.
With rising interest rates, real estate investments and real estate stocks typically experience a decline in value at least 60% of the time. If the cost of real estate growth is financed by debt, higher interest rates increase the costs of purchasing new assets.
5. Ask for a raise: It is essential that you ask for an increase in your salary in line with the increase in the cost of living. Also raise the prices of any services you offer to keep up with inflation. Commoditized services, including logistics, catering and other services, have recently seen price increases in line with inflation.
(By Neha Juneja, CEO and Co-Founder, IndiaP2P.com)