scorecardresearchIndependence Day 2023: How to battle menace of inflation in your quest

Independence Day 2023: How to battle menace of inflation in your quest for financial freedom?

Updated: 14 Aug 2023, 02:17 PM IST

India is facing elevated inflation, marked by a 7.01% CPI in May 2023, which can undermine financial independence by diminishing the value of savings and investments over time.

 By pushing the prices higher, inflation impacts the value of assets too.

By pushing the prices higher, inflation impacts the value of assets too.

India is currently experiencing high inflation, with the Consumer Price Index (CPI) rising to 7.01% in May 2023. This is the highest inflation rate in India since May 2014. 

Inflation can have a significant impact on financial independence, as it can erode the purchasing power of savings and investments. This means that the money you have saved today may not be sufficient to buy as much in the future.

Impact of inflation on financial independence

Reduced purchasing power: Inflation erodes the purchasing power of money. With the rise in prices, individuals are unable to buy the same amount of goods and services as before. This reduces their financial independence and limits their ability to save and invest. 

For example, if you have saved 100,000 and the rate of inflation is 5 percent, your savings will be worth 95,000 in real terms after one year.

Higher cost of living: Inflation leads to an increase in the cost of living. Basic necessities such as food, housing, and healthcare become more expensive, putting a strain on households' budgets. This can lead to a decline in savings and a higher dependency on credit, thus delaying the prospect of financial independence.

Declining value of assets: By pushing the prices higher, inflation impacts the value of assets too. For example, real estate prices may rise rapidly due to inflation, making it difficult for individuals to afford or invest in property. This can hinder their ability to build wealth and achieve financial independence.

How to combat the impact of inflation on financial independence

Budgeting and tracking expenses: Making a budget and keeping a track of expenses can help individuals prioritise their spending and save money. By identifying unnecessary expenses and making conscious choices, individuals can combat the impact of inflation on their financial independence.

Investing in assets: Investing in assets such as stocks, bonds, or real estate can be a hedge against inflation. These assets tend to appreciate in value over time, providing a potential source of income and wealth preservation.

Diversify income sources: Relying solely on one source of income can leave individuals vulnerable to inflation. Diversifying income sources, such as starting a side business, freelancing, or investing in passive income streams, can provide a cushion against the impact of rising prices.

Invest in inflation-protected securities: Inflation-protected securities, such as inflation-indexed bonds, can protect your investments against the erosion of purchasing power. These securities adjust their principal and interest payments based on inflation, ensuring that the investor's returns keep pace with rising prices.

Regularly review and adjust investments: Inflation rates can vary over time, and certain sectors may be more affected than others. Regularly reviewing and adjusting investment portfolios can help individuals stay ahead of inflation and make informed decisions to protect their financial independence.

In conclusion, inflation in India has a significant impact on the financial independence of individuals and households. It reduces purchasing power, increases living expenses, and can hinder asset growth.

However, by implementing strategies such as budgeting, diversifying income sources, investing in assets, and taking advantage of inflation-protected securities, individuals can combat the effects of inflation and maintain their financial independence.

Regular review and adjustment of investments are also critical to protect against the varying rates of inflation. By taking proactive steps, individuals can mitigate the impact of inflation and secure their financial future.

Investments to beat inflation
First Published: 14 Aug 2023, 02:17 PM IST