The importance of being able to safeguard your financial objectives from inflation
When creating your financial plan, a general inflation rate of, say, 7% doesn’t really imply anything. Even expensive medical procedures and vacations are not that much more expensive. They move by much faster.
In June, the Consumer Price Index recorded the highest monthly inflation rate in about eight years, coming in at 7.01 percent. This indicates that during the previous year, prices had increased by around that amount.
Simply said, if your current monthly spending is roughly Rs 60,000, at the present rate of inflation, you would require about Rs 1.44 lakh per month in 10 years and Rs 2.33 lakh per month in 15 years to purchase the same products and services. In simple terms, inflation lowers the value of your money for purchases.
Financial planners frequently take inflation into account for the numerous purposes for which people save money. How much inflation should you actually plan for, though? Would all commodity prices and living costs increase by that much?
Vegetable prices increased by 18.3% in May 2022. Aside from the cost of travel, medical and educational costs also increase more quickly. According to Tivesh Shah, financial adviser and creator of Tru-Worth Financials, “when preparing for future spending, we estimate groceries to climb at 6 percent, school expenses at 10 percent, holiday preparation at 8 percent, and so on.”
But he also points out that these figures have increased by 2 percentage points overall over the last two years, as shown in the graph.
It is necessary to budget for higher healthcare service prices in the event of growing inflation. Medical inflation rates peaked at around 20–22% during COVID, according to Adarsh Agarwal, chief distribution officer of Digit Insurance, a general insurance company with its headquarters in Bengaluru.
The cost of health insurance increased as well. According to a Mercer Marsh Benefits analysis, Asia saw the largest growth in employer health insurance premiums in 2022, rising by 15%.
However, medical inflation has been taken into account by planners at a rate of 12%. So, should financial planners take health insurance into account when calculating the rate of inflation?
“Rates won’t remain this high. The 11–12% rise in medical expenses should be taken into account when selecting an insurance plan. A top-up cover that increases the amount insured by 15-20% every two years will help with sum-assured sufficiency, and a base cover of Rs 15-20 lakh can be chosen as well, according to Agarwal.
In the first year of the pandemic, we saw that the total claim cost escalation increased by more than 30%, which can be ascribed to hospitals’ providing some basic, required diagnostics and hygiene connected to the epidemic.
The next year, this was reduced to an inflation rate of about 10%. Customers must take medical inflation into account when selecting an appropriate sum insured when purchasing a health insurance policy in order to be protected against medical emergencies and to receive quality medical care without depleting their savings, according to Bhaskar Nerurkar, Head of the Health Administration Team at Bajaj Allianz General Insurance.
A separate medical emergency fund is advised by Vivek Damani, founder of Mumbai-based financial services company Jeevan Prabandhan, “since a significant portion of medical expenditures are not covered by insurance.”
Inflation in education
School and college tuitions increase in line with medical costs. Financial experts suggest increased prudence because these expenditures cannot be cut. Despite the fact that the country’s overall inflation rate is now hovering at approximately 7%, according to Damani, you must budget for cost increases of at least 12–15% when taking education ambitions into account.
If it’s for international schooling, be sure to increase your savings and planning and plan for inflation to be more than that.
Shah draws attention to the fact that when income and expectations grow, so do living costs. “Men, who previously didn’t put much effort into grooming, now spend on self-upkeep and grooming.”
After COVID, fitness and gym expenditures were also included in the monthly budget. He added that in a few years, every member of the family would need a new smartphone, emphasising the need to plan ahead for increased inflation.
Even with additional prices taken into account, things might still get out of hand. ” An Indian postgraduate aspiration might become a desire to study abroad. If the family now desires a destination wedding, the straightforward financial objective for the wedding would need to be upgraded, according to Suresh Sadagopan, founder of Ladder7 Financial Advisory.
How to prevent being let down
Here are three suggestions for choosing the proper inflation rate to guarantee that your financial objectives are attained: Increase your corpus by investing more than you first anticipated. Most of us anticipate unforeseen costs when we first start our investing path and budget for liquidity, sometimes a little bit too much.
Avoid the increased costs, but keep making investments. “The surplus may be impacted by an increase in expenditures, so we will maintain a margin.” Therefore, we commit to regular investment plans of Rs 70,000 to Rs 80,000 if a person with Rs 2.5 lakh in monthly income may handle saving Rs 1 lakh or more, said Sadagopan.
Reducing returns: Be cautious when predicting returns in your financial strategy. In the past, according to many financial advisors Moneycontrol talked with, they would forecast an expected return on stock investments of around 15%. No more. Many people now anticipate an equity return of 12%.
As the entire global economy has been moving slowly and the pace of growth will be reduced, “the rate of return from stocks and mutual funds is being built in at 10-11 percent.” According to Shah, inflation would result in increased input prices for enterprises, which might have an impact on their profitability.
Even returns from debt funds have decreased recently, from about 9% to 4%. Save wisely during your earning years by increasing your investments gradually. It’s critical to increase your savings while you are working, according to VR Wealth Advisors founder and CEO Vivek Rege. When the active era has ended and you realize that the money spent during the earning years should have been preserved, he warned that “high inflation could harm your finances.”
Many people’s earning windows are also getting shorter owing to burnout or other factors. Additionally, a forced early retirement cuts the time needed to accumulate that nest fund.
Not all inflation is negative.
Inflation might help you save taxes by lowering the buying power of your money. This is because when determining how much tax you must pay, the profits from selling various assets, including equities, debt mutual funds, gold jewelry, and real estate, are also taken into account.
This is especially true if you have invested in real estate for longer than two years and debt mutual funds for longer than three years. We refer to this as indexation advantages. In other words, indexation inflates your asset’s cost price unnaturally. This makes sure that you pay less tax on the capital gains and that, at least on paper, the difference between your selling price and cost price decreases.
edited and proofread by nikita sharma