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5 ways to Save & Invest when inflation is high

Sep-02-2022


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Inflation rates have been soaring across the globe, and you likely felt the pinch of rising expenses. 

 

High inflation is decreasing the value of cash sitting in our bank accounts. Consumer inflation is touching 8% and your personal inflation rate may be even higher. 

While moderate levels of inflation may be good for the economy, high inflation is bad news for you as a consumer and as an investor. Experts suggest that inflation is likely to remain high for some more time.

 

 

Here are some tips to counter the impact of inflation on your finances:

 

1. Measure i.e. estimate your personal inflation rate. You can do this by simply comparing your expenses on regular items between two time periods. You can also choose from many of the expense management tools available today.   

The consumer inflation number is a consolidated figure representing the standard weights of different categories of spending. For instance, food inflation is ranging between 11 to 14% while rent inflation is lower. These differences make it all the more important for us to understand how much we are personally affected by rising prices.

 

2. Tighten expenses: Obviously. Inflation is good motivation to cut back on less necessary expenses. Take a look at your bank/credit card statement to analyse. 

You can also apply one of the popular mental frameworks or budgeting strategies such as the 50:30:30 budget where you spend 50% on needs, 30% on wants, and straight away save 20%, or, the zero-based budget where list all your expenses and subtract them from your income, helping you prioritize. There are other frameworks as well to get you started in a structured way.

 

3. Invest in assets that offer clear, positive real returns.

Real returns = Indicated investment earnings - Inflation rate. While FDs are giving negative returns at the moment, some of your other investments might also be doing the same. It’s important to churn investments from time to time to ensure that your returns are healthy

 

 

4. Know that all investments are not equally affected by high inflation.  

To control inflation, central banks increase interest rates which affect businesses and sectors differently. Be extra careful while investing in stocks/companies that require regular capital infusion for their business model. For example equipment leasing/rental businesses that constantly need to buy new equipment and retire older batches. The sales of certain goods and brands drop when prices increase; companies with better brand power are better geared to maintain sales at higher prices. 

Companies that are leveraged i.e. take on debt are likely to see an increase in debt servicing costs which impacts profitability. Some companies choose to reduce debt in such times affecting future growth prospects.  

 

For bond investors, it’s good to remember that bond prices and interest rates are inversely proportional. Increasing interest rates affect every kind of debt instrument, however, the impact is more severe on the medium to longer duration debts than the shorter ones. This is because the price fluctuation is very low in short-term instruments. 

Hence, debt instruments that invest for a shorter period perform better in a rising interest rate scenario. On the other hand, medium and long-term debt instruments witness a price correction. 

 

Coming to real estate investments, as is seen in the past, whenever the interest rates go up, property stocks tend to lose value at least 60% of the time. Higher interest rates make acquisition costs of new assets more expensive if real estate expansion is financed through borrowings. 

 

 

5. Seek a raise, and increase the price of your service in line with inflation. The prices of commoditized services such as logistics, dining etc. have seen recent increases in line with inflation. You should also seek an increase in the price of your time, product, or service if required.

 

 

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