Inflation: Lifestyle cutbacks, other strategies may help investors protect their future

Inflation in simple terms means a reduction in the value of money. So, the same dollar is now able to fetch a lower quantity of goods vs earlier. It’s said that “Mahogany in the hands of men may turn into a work of art: an engraved table, perhaps. Give that same table to termites, and it is but sawdust.” Inflation is the same termite which can completely eat into household savings, which otherwise could have been used for buying a home or a car in the future.

Pawan Parakh - Director & Portfolio Manager, Renaissance Investment Managers - traditional wisdom states that a household constantly endeavors to have a lifestyle commensurate with current expenses and the future lifestyle that one plans to lead. In this equation, inflation is a hidden variable, which often gets ignored. 

"Inflation not only leads to an increase in prices of daily necessary products but also an increase in interest rates. This implies high EMIs for homes or cars. To make things worse, the inflationary environment also drives a slowdown in corporate earnings which could push them to lay off employees. Potentially the life of a household can be completely upended with a loss in income and an increase in expenses," Parakh said.

It’s also very important for investors to realize that, generally, the inflation scare comes to haunt us after every 5-8 years cycle and is inevitable. One can escape it only by preparing well ahead of time. 

"Savings is one prominent antidote against inflation. To drive savings, one should clearly distinguish between necessity and luxury. A penny saved is a penny earned. If a person can identify expenses, which can be avoided, it can go a long way in saving a substantial sum of money. Given the sheer power of compounding, a rupee saved today can potentially be 3-5x higher 8-10 years down the line. Cutting in several discretionary expenditures can negatively affect lifestyle today but can help in securing a better future," Parakh added.

In addition, a household could use smart ways of monitoring expenditures like creating spending limits of a credit card. This is specifically helpful for large families or young people which find it difficult to track their expenses. For those who can monitor their expenses, can create upper limits on a particular category of expenses. Alternatively, an investor can prioritize his MF SIPs or home loan EMIs ahead at the beginning of the month to ensure an upper limit of daily expenses.

Essentially it is critical to understand the serious negative repercussions of an inflationary environment. The onus is on the household to act smartly and well ahead of time to have a secure future.