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How to deal with High Inflation
Inflation is once again on the boil. Here are a few strategies that can help you fight the incessant march of prices.
While there is little you can do to control inflation or change the course of the monsoon, you can reduce the stress on your finances by spending smartly, consuming efficiently and investing intelligently.
But if you adopt even 4-5 of these ideas, you would be able to cushion yourself from inflation to a certain extent.
1 Plan Your Shopping In Advance
Check your inventory and draw up a shopping list before you go to the market. Make a list of items you need and stick to the plan. Making purchasing decisions on the spur of the moment, swayed by combo deals or lured by the siren song of attractive displays, makes you more susceptible to buying items you don't really need. The rule of thumb is to never go grocery shopping on an empty stomach because food looks a lot more appealing when the belly is growling. You are more likely to be tempted to buy an extra pack of muffins or a large pack of chips, sending your budget haywire. Eat well before you head for the supermarket. Also, if you are a compulsive shopper, take hard cash instead of your credit card. While plastic has made spending easier, tracking how much you really spend has become difficult. Research shows that cash payments pinch more, forcing you to be circumspect when it comes to spending.
2 Shed Brand Consciousness
The thousands of crores of rupees that FMCG companies spend on advertising their wares are recovered from consumers through higher product prices. You can avoid paying high prices by opting for the home brands of large retail chains or the unbranded merchandise at your local kirana shop.
This may not apply to personal care products like soaps and toothpastes or certain foodstuffs but you can safely go for unbranded items of homecare products like floor cleaners and detergents. Also avoid paying more for packaged spices and condiments. If you buy loose, you can get the same stuff at a much lower price. Remember, the fancy packaging and advertising costs are built into the price of branded items. Just keep a strict control on the quality when you buy loose.
3 Time Your Purchases With Sale Offers
Sale is a small word that can be a big opportunity for the careful spender. Many hypermarkets offer heavy discounts on different items almost throughout the year. While you cannot buy too much of foodstuff, you can stock up on non-perishables when there is a sale. Paper towels, soaps, detergents and many such items can be easily stored for months.
Similarly, your clothing bill can be cut by 25-30% if you buy during off-season sales.
But there is also a downside. You get to wear the clothes only next year. Do the math when you go shopping. A 20% discount on a single shirt may be a better deal than a buy-2-get-1-free offer that makes you purchase more than you need. Besides, the lowest value item is free in the deal.
4 Form Mini Cooperative And Buy In Bulk
Any product will obviously be cheaper in the wholesale market. At `32-33 a kg, the wholesale price of sugar is almost 20% lower than the retail price of `38-40 a kg. The only glitch: you will have to purchase a larger quantity when you go to the wholesale market. The problem is that you have to buy a 50 kg sack of sugar in wholesale. You can get around this problem by forming mini-cooperatives with 3-4 friends or neighbours who may want to share the effort as also the gains.
One of them can drive to the mandi every week by rotation.
5 Minimise Food Wastage at Home
Food items are cheaper if you purchase in bulk from a wholesale market. But not all vegetables are fit for bulk deals. Some vegetables are very perishable so you might end up wasting money instead of saving it. Potatoes and onions are perfect candidates for bulk purchases because you can store them for days, even weeks. Other vegetables, such as bitter gourds, carrots, cucumber, tomatoes and radishes cannot be stored for more than 4-5 days. Leafy vegetables, such as spinach and fenugreek, will turn squishy after a day or two. These are best bought just when you need them in small quantities. No doubt this will be costlier than the bulk rate, but you also avoid wastage.
According to one estimate, the average urban household in India wastes about 15-20% of the food it buys. Imagine what this means in rupee terms. Assuming that the average urban, middle-class household spends `15,000 a month on food, nearly `2,250-3,000 worth of food is thrown into the waste bin every month. The opportunity cost can be mind-boggling. While you cannot avoid wastage completely, you can curtail the waste by careful consumption.
6 Form A Car Pool
Is the cost of fuel pinching you? Try forming a car pool to share the costs with other people headed in the same direction. Yes, this requires some logistics but the arrangement can be very rewarding for the car-pool members. If your current fuel bill is `4,000 a month, sharing with 2-3 others will bring it down to roughly `1,800-2,000. A big benefit is that you can check your emails and catch up on news during the commute on the days you are not driving. In extreme situations, one might even take a short nap during the journey. Some companies actively encourage employees to join car pools by creating forums. There are also websites that help you find people in your area who can be tapped for joining the pool. Car pooling also helps you save on parking charges and toll fee. As a fringe benefit, you also do your bit for the conservation of the environment.
7 Take Lunch To Office
This might seem like a no-brainer but taking lunch to office can help you save a lot of money.
Given the way prices are moving, an average lunch costs about `150 per head. It's a little lower if you settle for fast food. You can save that money if you take lunch from home. ET Wealth estimates that taking lunch to office can save an average office goer roughly `2,800-3,000 a month.
Imagine how much you stand to gain if that money flowed into a recurring deposit or an equity fund every month. You also save time because you don't have to step out of office. The other advantage is that you get to eat wholesome homemade food instead of the unhealthy stuff served at fast-food joints and eateries.
8 Don't Let Money Idle In A Savings Account
Even if it is lying in your bank account, your money is not safe. Inflation nibbles into its value every day, eroding its purchasing power. The value erosion would be greater if you have cash lying inside a locker but even in a savings bank account it loses value. Here is a perspective of what 10% inflation can do to your savings.
If you have `50,000 in your bank account, it will grow to about `52,000 in one year. But one year from now prices will be higher and `52,000 will buy only goods worth `47,270 today. So, don't let your money idle in a savings bank account. Never mind the attractive 6-7% being offered on the balance by some banks. Your money must grow faster than that to retain its purchasing power. Opt for a sweep-in bank account. These accounts combine the high returns of a fixed deposit with the liquidity of a savings bank account. You can also put your money in a short-term debt fund for higher returns.
9 Don't Avoid Equities Completely Even If You Are Risk Averse
It is often said that a diversified portfolio is a good hedge against volatility. But it can also be your shield against inflation. Do not shy away from volatile assets such as stocks if you want to stay ahead of consumer prices.
Even the most risk-averse investor should have at least 10-15% in equities. A 100% debt portfolio will always lag behind the inflation rate. This is also why the monthly income plans from mutual funds have about 10-20% of their corpus in stocks. Besides equities, gold is also seen as a hedge against inflation.
But don't allocate more than 10% of your portfolio to the yellow metal. Experts say that gold is no longer the safe haven it has always been.
10 Take Advantage of Tax Benefit From Inflation
Curiously, investors also stand to gain from high inflation because it helps reduce their tax on capital gains. Tax rules allow investors to adjust the cost of an asset to the inflation during the holding period. The cost inflation number for 2013-14 is 939, and could be roughly 10% higher at 1,032 for this year. This means if you choose the indexation option, you won't have to pay any tax even if your investment earned 10% annualised returns in the past five years. What's more, you can book a notional loss if the investment lagged inflation during the period and adjust it against gains from other investments. If it can't be adjusted in the current year, this loss can be carried forward for up to eight financial years. However, only certain investments (debt funds, FMPs, gold funds and debt-oriented hybrid schemes) are eligible for indexation benefit.
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