Case Study - Manage Inflation & Finances

Every one knows cost of living is rising every year, which is called inflation in economic terms. Inflation occurs due to imbalance between supply and demand. Imbalance occur due to growing population needs and we will always have limited resources to cater. 

Though there are various methods adopted by government to calculate actual inflation, but whatever overall inflation rate we get is 7 to 8% and that has become an acceptable norm these days. In certain sectors inflation may be quite higher than the normal.

Inflation leaves greater impact and affects other parameters in the country economy like currency depreciation or appreciation, interest rates increase or decrease, no liquidity or excess liquidity, slow down, recession etc. and generally to balance or bring the inflation rate down, country's central banks puts strict curbs by increasing interest rates and sucking money back from the market and this cycles goes on periodically.

Well the inflation cycle will come and go, but it leaves lasting impact on personal finances, it gets disturbed & distressed as our income do not rise, but the cost of living rises rapidly. It eats our saving, capital without our knowledge and some life emergencies, celebration events, particular investments in goals & dreams may take away all the capital or may get us in to huge loans that we cannot repay.

So it is critical to understand, be prepared for such inflation cycles, emergencies and financial goals in advance to stay away from unwanted stress and face life surprises smoothly as they come.

Generally, we will need to save the money, when we are getting regular income from business or job. Save the money in right instruments such that it at least gets you returns more than the basic inflation rate to protect the capital and buying power. 

Typical allocation towards saving could be

1. Buy enough Life Insurance, Health Insurance etc.

2. Allocate some amount towards tax saving schemes

3. Allocate some amount towards long terms financial goals like Child Education, Marriage, Retirement etc. 

4. Loan EMI's should be within the limit of your total earnings, plan such and try to minimize or nil the loans as much as possible as you come closer to your retirement.

5. Avoid credit card loans, personal loans as they are very costly.

6. Lastly, keep some cash/liquid money ALWAYS at disposals for adhoc or emergency situations.

Parimal Shah

Business Partner - Financial Products

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