Beat inflation with financial plan

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How to Beat Inflation with Financial Plan?

2014

The economy has been suffering from the impact of a high inflation rate for the past two years. A high inflation rate is a reality that investors have to cope with in a developing economy such as this. Inflation is a slow, silent killer, which gradually erodes the value of money, and in turn the value of accumulated savings. Inflation can erode wealth over the years.

To accumulate wealth, it is necessary for the year-on year growth in accumulated savings to be higher than the inflation rate. If your accumulated savings are growing at a rate lower than the inflation rate, your savings corpus is actually shrinking as the value of rupee today will be lower than what it was at the beginning of the year. The rupee today will fetch lesser goods and services than what it did a year ago due to inflation. Hence, beating inflation is very important for any investor.

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Evaluate Real Returns Adjusting your portfolio to combat inflation earlier rather than later can make a big difference. Today, the interest rates of savings accounts and fixed deposits are paying interest rates lower than the inflation

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rate. After adjusting for taxes it is even lower. Fixed deposit returns do not compensate for even food price inflation, let alone the total inflation. Money in a fixed deposit account that matures today will buy lesser goods and services than it did a few years ago, when the fixed deposit was initiated. So, despite earning nominal returns of say eight percent per annum, in reality, fixed deposits give negative returns in ‘real terms’ and reduce the value of investments in terms of ‘real value’.

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Invest in Real Estate For this reason, investors must see to it that real returns on investments beat inflation. Gold is usually a very popular investment to combat inflation as it appreciates in value against a currency during inflationary times. Apart from gold and real estate, commodities, and stocks in the consumer goods sector are usually a good hedge against inflation in any portfolio. Real estate is a great investment at any time, and it is even better during times of rising inflation. Limited availability of land and rising population growth will increase housing demand and hence real estate in general has the potential to beat inflation easily.

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Impact of inflation on housing loan Having said that real estate or property is a good hedge against inflation, it is important to understand the impact of inflation on housing loans. In India, 90 percent of property purchase is done through a loan. Actually, inflation has a positive impact on a loan borrowed. The ‘real value’ of the rupee at the time of borrowing is much higher than its ‘real value’ when the loan is repaid. As the loan amount is not adjusted for inflation, the borrower is the beneficiary. However, the impact of inflation is felt through a rise in interest rates. As inflation goes up the interest rates rise to combat it. Consequently, the cost of borrowing goes up. This increases the outgo in EMI payments.

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Planning for inflation

September 2013

Investors have to plan their finances in advance to combat inflation. Here, a certain level of inflation is a given. That makes it easy to anticipate and plan for it. While making a housing budget, an investor should budget for an increase in prices of daily needs. You can factor in an appreciation say five percent in prices of all food items year on-year. Similarly, you should plan for a marginal increase in the EMI payments in an increasing interest rate environment. You can set aside some funds in a short-term fixed deposit to use in case the EMI

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installments start increasing. Many individual investors do not understand the impact of inflation fully. Hence, it is imperative that they equip themselves with the requisite knowledge that helps them protect their wealth from further erosion. About these ads

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