One of our many financial grievances today is dealing with rising inflation. According to government data, the annual inflation rate in India increased to a five-month high of 7.41% in September of 2022 from 7% in August, above market forecasts of 7.3%. This April we saw the highest level of prices observed in the last 8 years!
We have slowly and steadily witnessed how over time inflation has crept into our everyday lives. Household budgets have had to be readjusted, spending habits curbed and the disposable income of many has taken a hit in a short period of time. All of this has led us to wonder, “where is all my money going?”
The answer lies in understanding what inflation really is.
Simply put, inflation is a rise in the prices of goods and services. As your inflation increases, day by day so is your cost of living. Government data defines the inflation rate based on the basic needs of an individual.
However, if you plan on making the most of this holiday season by dining out, travelling or are preparing for the future by sending your kids for higher education, or planning your wedding, the inflation may affect you greatly. This is because all of these activities fall into the luxury category. While any big expense will take a hit on your savings, maintaining your current lifestyle with changing times would require accommodating rising inflation rates.
The ongoing Covid-19 epidemic, the conflict in Ukraine, supply chain constraints, and pent-up consumer demand have all contributed to persistently high pricing. As a result, customers are responding by altering their purchasing patterns. So is cutting down your spending the only solution?
The current status and the way inflation might continue to skyrocket in the future is something that all of us need to better equip ourselves with. Every avenue requires to be explored and implemented to create a fool-proof money guide against rising inflation.
Be savvy with your budgeting - Scaling back on your expenses is easier said than done, though, especially when the prices of most goods and services have increased substantially. The easiest path is to get back to basics. According to the Women & Money Power survey conducted by LXME, 73% of women were saving less than 20% of their income. The 50:30:20 rule ideally allocates 50% of your income to needs, 30% to wants, and 20% to savings and investments.
Following the budgeting rule will help you keep track of your expenses and maintain a budget. One pro-tip here is that as you get your income, save at least 20% of it first and then spend. It helps in instilling the habit of saving and a disciplined approach to money management.
Maintain an emergency fund: You might need to save more money to cover your costs as inflation increases. As a result of the high borrowing charges, you might wish to refrain from taking out any additional loans. Or even withdraw from your long-term assets, as doing so would prevent you from achieving your financial objectives. As a result, it's crucial to have an emergency fund that can cover at least six months' worth of spending and be immediately and easily accessible in case of an emergency.
Invest in equities for your long-term goals: According to the Women and Money Power Report 2022, 49% of women are investing in traditional instruments. Given the current scenario of rising inflation and regardless of the fact that interest on interest-linked instruments has risen due to the rise in repo rates, they will not be able to generate long-term returns that outperform inflation.
If you have long-term goals, make equity your friend, as it is a value-creating asset class. It must be included in your portfolio if you want to generate wealth and earn returns that beat inflation. Initial exposure to stocks may be obtained most easily through mutual funds. Furthermore, before making any investment, it's crucial to determine your objectives, risk tolerance, and time horizon. Only then can you decide what to do.
Cut down on unnecessary expenses: Scaling back your expenses is a deed easier said than done. Start by making a list of everything you spend on and then differentiate between your needs and wants. Needs are things you use regularly, such as food, groceries, and other necessities for your survival and basic existence. Wants are things you buy for your comfort or luxury such as going out to dine, home delivery, going to movie theatres, and so on. Now, it's up to you to sort through everything to figure out what suits your requirements and preferences. This exercise will show you effective strategies to manage your money in an era of growing inflation.
Examine each spend and look for offers or better deals: Since inflation is squeezing your wallet, it's important that you hunt for better deals and offers when making a purchase. All these, including rewards and cashback, are some ways that aid in saving that extra rupee. However, beware of credit card debt.
An inflation rise is a cautionary time for investments and holds the ability to cause a great impact on one’s expenses. Let’s build better money habits and make smart moves so that you can deal with inflation and manage your money efficiently.
Priti Rathi Gupta is the Founder & MD of LXME – India’s First Neobank for Women in the making