5 Smart Money Decisions You Could Take To Stay Ahead Of Inflation In These Trying Times

Rising inflation and fuel prices are continuously putting strain on the common man’s pocket. Though retail inflation in India has moderated to 6.71 per cent in July, it continues to stay well above the Reserve Bank of India’s (RBI) tolerance limit of 4-6 per cent. 

Food inflation in India moderated at 6.75 per cent in July as compared to 7.75 per cent in June. Higher fuel prices lead to higher transportation costs, which in turn, increases the cost of daily food commodities, as well as non-essential products. 

A hike in fuel, oil, and travel costs also impacts the costs of fast-moving consumer good (FMCG) products, by hiking their prices by at least 2-10 10 per cent across categories, including the price of pharma products. The rising inflation also results in rising interest rates that affect the home purchase decision of people, as it increase home loan rates and leads to higher equated monthly instalments (EMIs).

While people cannot control inflation or fuel prices, they can certainly make smart money decisions that will help them to stay ahead of inflation now and in the future.

FIVE SMART MONEY TIPS

Here are five smart money decisions you can also take to stay ahead of inflation

Investment return expectations above inflation: The real impact of inflation is actually felt in the long term, and so investments should be made keeping that in mind. 

Says Anant Ladha, founder, Invest Aaj For Kal, a financial planning firm: “You won’t feel the impact of inflation in one year, but if you see in 10 years, you will know the reality. So, to fight it, we need to invest in places where return expectations are above inflation. Options, such as mutual funds and real estate investments have to be considered.”

Manage your debt and pay off loan against floating rate of interest: The RBI has been raising interest rates and is likely to do so again, meaning that the cost of variable-rate debt will continue to increase. 

“Paying it down, or paying it off, or consolidating this debt into lower fixed-rate debt is a way to deflect the blow of inflation,” says Ladha.

During periods of high inflation, when the central government raises the interest rate to tame inflation, the cost of borrowing goes up. 

“Thus, besides following a strict family budget, one needs to focus on quickly paying off any loan against which floating rate of interest is charged. If surplus can be generated after meeting the family’s necessary expenses, insurance premiums and ongoing investments, it can be used to pay off the outstanding loan where the floating rate of interest is charged,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.

Invest in fixed income products: Where debt investments are suitable for people according to their investment objective, the investment time horizon, and risk profile, they consider investing in fixed income products worthy during periods of interest rate hikes by the central bank. But, the reality is different.

In October 2021, the deposit rate on a one-year fixed deposit (FD) was around 5.10 per cent. Due to recent rate hike by the RBI, if one opts for a one-year FD now (August, 2022), the rate of return is around 5.45 per cent. Although the interest income has increased, it’s still not enough to cope up with the prevailing inflation.

“Where inflation is around seven per cent, the real rate of return from FD becomes negative. If an investor doesn’t fall under any tax bracket, the real rate of return (post inflation) is -1.55 per cent. If an investor falls in the 20 per cent tax bracket, the real rate of return (post inflation and post-tax) turns out to be -2.47 per cent. The impact will be different for people under other tax brackets (five per cent, 10 per cent, 15 per cent, 25 per cent and 30 per cent). Thus, we can see how the silent killers (both tax and inflation) are negatively impacting a person in reality,” says Sen. 

Short-term debt investment vehicles: At times, people tend to procrastinate their savings and investment plan for their goals. Let’s assume, someone has a goal to achieve in 10 years. Due to the habit of procrastination, he/she has been ignoring the need to invest for the said goal till now. Suddenly, when only four-five years remain, he/she begins looking for products which are giving high returns on investments, so that he/she can achieve the goal amount in the remaining time frame. 

But the reality is different, as investments do not grow in a short duration of time.

“Injecting a note of caution becomes necessary here. With the aim of looking for short-term debt investment instruments, one must not just look for high interest-bearing options. The high interest-bearing instruments may have high credit-risk, too (chance of not getting back capital invested and/or interest),” explains Sen.