Expense list to loan tenure: How to stay ahead of rising inflation

Maintain adequate allocation for equities in long-term portfolios for financial security

After falling for two months, the Consumer Price Index-based inflation increased to 6.52 per cent in January. This is above the Reserve Bank of India's (RBI) tolerance band. CPI-based inflation stood at 5.72 per cent in December. What this means is that households and investors can't afford to lower their vigil against inflation. Here is what they may do to manage costs.

Adhere to a budget

At the start of the budgeting exercise, take a sheet of paper and draw a vertical line down the middle. On the left-hand side, list your monthly earnings. On the right-hand side, list your expenses. Include non-monthly (quarterly, half yearly, and yearly) expenses also, but take an average monthly figure. “When you total up the two halves, you will get a good idea of where you stand,” says Col. Sanjeev Govila (retd.), a Sebi-registered investment advisor (RIA) and CEO, Hum Fauji Initiatives, a financial planning firm.

In the second step, tick the essential, non-avoidable expenses that can't be curtailed. Rent, transportation, school fees, insurance, and food would fall within this category. “The non-ticked items are the discretionary expenses that you should focus on curtailing,” says Govila.

While carrying out these one-time exercises is easy, rigorously sticking to the budget month after month is harder. Financial planners say that for this effort to bear fruit, there must be buy-in from all members of a family. “Automating things and setting strict spending limits will help,” says Govila. He suggests using an Excel sheet that offers a reverse count on the monthly amount (that is, the amount left to be spent under each head keeps decreasing as you spend).

At the same time, remember that making things too hard for your family can rebound.

Lower cost of loan

This is a good time to re-evaluate your existing loans. “If you are facing a cash crunch, increase the loan tenor. This will reduce your immediate EMI burden,” says M Barve, founder, MB Wealth Financial Solutions. Most lenders will agree to this. However, do prepay the loan or hike the EMI as soon as your situation improves, otherwise your interest burden on the loan will skyrocket.

The other step you can take, according to Barve, is to refinance your loan or negotiate with your existing lender for a better rate.

Limit credit card expenditure each month to the amount you repay. By not revolving, you will avoid falling prey to high-cost debt. If you have a lot of credit card outstanding already, convert it into lower-cost EMIs. Repaying this debt by taking a personal loan is another option. The option of taking a gold loan (which is asset-backed and hence cheaper) to repay the credit card outstanding may be exercised if the amount is large.

How to reduce spending

On the spending side, take a hard look at your mobile and internet plans. “Use combination plans and family plans to control these spends,” says Barve.

For many items of daily use, you can down-trade to lower cost brands until your situation improves.

Considerable savings can also be achieved by minimising the consumption of electricity at home and usage of four wheelers.

Your longer-term portfolios must have a substantial allocation to equities. “Over the long term, this is one asset class that has a strong chance of beating inflation,” says Deepesh Raghaw, a Sebi-registered investment advisor (RIA) and founder, PersonalFinancePlan.

Fixed-income products must also be included in the portfolio, primarily to provide diversification and to lend stability. But they won’t help you beat inflation. Similarly, gold can provide diversification (it tends to do well when equities are in trouble) and it can also provide an inflation hedge (the yellow metal retains its purchasing power over the long term). 

Long-term SIPs in equity funds can help your portfolio beat inflation 
 

Category average SIP returns (%)
Equity fund category	1-year	3-year	5-year	7-year	10-year
Large-cap	6	13.7	12.7	11.6	11.8
Large- & mid-cap	5.7	16.3	14.7	13.2	13.6
Flexi-cap	4	13.9	13.5	12.7	13
Multi-cap	6	17.1	17	14.9	14.9
Mid-cap	4.8	19.1	17.1	15	15.7
Small-cap	7.4	27.2	21.9	17.8	17.6

Returns are of regular, growth plans
 

Source: Morningstar AWS