Feeling the inflation pinch? Cut back on discretionary expenses

If home loan EMI is straining your budget, ask lender to increase tenor

Mary J (name changed on request), 44, a resident of Mumbai, works with a private company engaged in import and export. In recent months, she says, inflation has begun to pinch hard.  

“Almost everything has turned more expensive — from groceries to transportation costs. Even my home loan rate was increased by 35 basis points (0.35 per cent) last week. Unfortunately, with my company not doing well, I have not received a salary hike in the past two years,” she says.

Consumer Price Index (CPI)-based inflation stood at 6.95 per cent in March 2022. 

According to a Reuters poll of 45 economists, it is likely to surge to an 18-month high of 7.5 per cent in April.

Rising food, fuel, and commodity prices are all contributing to household woes.

Priti Rathi Gupta, founder, LXME, says, “While CPI-based inflation is at 6.95 per cent, our personal inflation rate is more likely to average around 10 per cent.”

Zero in on personal inflation rate

To deal with this surge in inflation, you need to first understand its impact on your budget.

Pankaj Mathpal, managing director, Optima Money Manager, says, “While the official rate of inflation is important, it doesn’t take into account the increase in the costs of the basket of products and services you use. That is why before you try to tweak your budget, you need to understand how your personal inflation rate has changed.”

M Barve, founder, MB Wealth Financial Solution, adds, “Where you live, whether you travel or work remotely, your dietary habits, etc all affect your personal inflation rate.”

Note down all the items you spend on in a typical month. Then calculate how much your overall expenditure has risen compared to the same month last year.

Pare discretionary expenses

The exercise you did to calculate your personal inflation rate would have provided you with an overview of your spending pattern. In case you don’t have the data on monthly expenses, take a month’s time to record it.

“Use a journal or an online spreadsheet to record all your current incomes and expenses,” says Rathi Gupta.

Once you have this data, she says, you can zero in on the areas where you need to curtail expenses. Separating fixed and discretionary expenses will also help.

Vishal Dhawan, board member, Association of Registered Investment Advisers, says, “Separate your fixed and discretionary spends, and focus on curtailing the latter as far as possible.”

If you have a big-ticket loan, such as a home loan, try to reduce your interest outgo by using any idle cash or windfall to prepay the principal.

“If inflation is imposing a strain on your cash flows, increase your loan tenor temporarily. This will reduce your equated monthly instalment (EMI). As soon as your cash flows improve, increase the EMI back to the original level,” says Dhawan.

Try to augment income

Besides trying to curtail expenses, try to enhance your earnings.

“In this new normal, everyone needs to have a second source of income. This could be income from a side hustle, rental income, dividend income, etc,” says Mathpal.

If your bargaining position is strong, ask your employer for a raise.  

Maintain equity allocation

Try not to reduce your equity allocation despite rising market volatility.

“Only by allocating to equities, in line with your risk appetite, can you earn inflation-beating returns over the long run,” says Rathi Gupta.

Stick to your budget

The surge in inflation has caused many people to deviate from their budgets.

“According to the Women & Money Power survey conducted by LXME, 73 per cent of respondents were saving less than 20 per cent of their income,” says Rathi Gupta.

According to her, every person should adhere to the 50:30:20 rule, which suggests that 50 per cent of your income should go towards meeting your needs, 30 per cent towards meeting your wants, and 20 per cent should be allocated to savings and investments. This is the goal you should work towards.