It can be difficult for the average consumer to effectively navigate a high inflationary environment. Witnessing a sudden and drastic increase in prices of everyday items can put many out of balance. These state of affairs warrant individuals to take a step back and evaluate their financials; how they use their money, and where to put it.
Here are some suggestions that can help individual make better financial decisions whilst a high inflationary environment
Reduce or control your discretionary spending
Discretionary expenses refer to a cost that an individual or business can survive without and are not classified as a necessity. While this might not be what you want to hear, your daily take-out routine, weekly night out with friends, and late-night shopping sprees are putting you at serious risk, especially during such a volatile economic environment.
During times of high inflation, households and businesses should think of cutting back on certain non-essential expenditures, anticipating an increase in costs of the non-discretionary expenses.
The best practice to keep yourself accountable is to track your discretionary expenses separately from your essential ones, so that it is easier to pinpoint problem areas. One common tactic that can be helpful in curbing discretionary expenditures is to rank them in order of importance. By doing so, one can easily identify and track non-essential expenditures according to their individual needs and desires.
Have matching investments
One way to have the upper hand during conditions of high inflation is by having matching investments. High-yield investments can help cross out high inflation. Rising interest rates have tipped the scales in favour of FDs. In this type of scenario, it may make sense to break the old low yield FDs and move to high-yielding new FDs.
It might even be advisable to invest in a fixed deposit for the short term to benefit from the high interest rates. Rates are expected to peak during the second half of 2023, therefore it is a good idea to increase allocation to FDs
By investing in assets whose returns outpace the rate of inflation, individuals can ensure that they beat inflation and any negative consequences the volatile economic scenario might have on their portfolio.
Historically, financial markets have beaten inflation in the long run. While there are certain advantages in thinking of short-term returns, fearing the downturn and not diversifying will put the average investor in a risky position that will be difficult to navigate once the market moves away from recession.
Due to compounding returns, the sooner one invests and the longer one retains the investment, the better, no matter the current economic scenario. Long-term investment in perennially reliable assets is one of the best ways to tackle inflation.
Don’t hold bank balance
Idle money in a savings account will see an immense downfall in value, especially during a high inflationary environment. Money that doesn’t work for you will only reduce in value over time. Inflation eats into the purchasing power of money because of which you will be able to buy less today than 5 years ago with the same absolute amount of money.
In essence, ₹100,000 deposited in a current account 5 years ago will now be worth a lot less. On the other hand, investing that money, even in low-risk investments, would help you break even in situations of high inflation, with change to spare.
All in all, the best way to ensure you and your money stay safe and combat a situation of high inflation is to be aware of expenses, and consistently ensure that you are properly diversified and fully invested.
Girish Rohira is Director at TresVista