"Inflation is violent as a mugger, frightening as an armed robber and deadly as a hit man."
This great saying sums up inflation or the rise in prices of goods and services with time. Retail inflation had risen to a 4-month high of 2.57% in February 2019. Prices of everything are on the rise from food items to consumer electronics to services. This begs the question. How can you make wise financial decisions during a price hike?
Let's understand consumer behavior during a price hike. Indians are price sensitive and even the affluent are value conscious. Postponing non essential purchases and even cuttingdown on essential spends during a price hike is the norm. The purchase of houses, cars and luxury goods are postponed till prices come down.
Many youth are shopping heavily availing personal loans and credit cards, even when prices are high. The culture of using borrowed money comes at the cost of saving, without a care on the consequences. The credit card becomes the emergency fund.
High prices are not the end of the road. Indian consumers can make wise financial choices and save a lot of money during a price hike.
• 1. Cut down unnecessary spends:
Curb impulsive purchases and spending on hobbies during a price hike. Make a shopping list and stick to it. Answer a set of questions. Is this item needed immediately? Can the purchase be postponed? Don't buy if you can live without it for now. Use the money for something more worthwhile.
For an expensive item, postpone the purchase decision by a week. Purchase an item only if there's use for it, a year down the line. Never let mood swings influence a spending decision. Avoid emotional purchases as this encourages spending on frivolous items. Don't purchase items just to show off on social media sites like Facebook and Instagram. Put a broad limit on regular expenses to keep them under control. Save at least a third of your income even during price hikes.
• 2. Save for a purchase:
An increase in pay or an annual bonus encourages spending even during a price hike. Save first and then spend. Set up an emergency fund with 6 months of living expenses for emergencies.
Track expenses with a monthly budget. The budget must include every rupee earned and spent. Never postpone saving. Enforce the saving habit and follow it religiously. Saving alone is not enough. Invest part of your savings to beat the adverse effects of rising prices.
Focus on daily saving during a price rise. Turn off lights and fans when not in use to save on electricity bills. Commute to office by public transport instead of the car. Avoid eating out and order through discount apps. Watch movies on weekdays instead of the weekends, as ticket prices are low. Cut down on the number of cigarettes if you can't quit smoking.Use the money saved to make the purchase.
• 3. Don't borrow to splurge:
Borrowing has never been this easy. The youth avail personal loans and payday loans to splurge, even when prices are high. Credit card spending has gone through the roof. Credit cards charge interest of 2-3% a month, leading to a loan trap.
Borrow only for emergencies,especially during a price hike. Live within your means and avail loans which can be easily repaid. Don't keep purchasing things on EMIs.
Missing an EMI or delaying payments impacts credit score and hinders chances of availing loans for important needs. Pay the entire credit card bill, even though minimum monthly amount seems enticing.
Banks offer the option of paying just 4-5% of the credit card outstanding amount and the balance gets rolled over to the next month. Don't fall for this and land in the debt trap.
• 4. Don't stop investing:
Never quit or postpone investing during a price hike. Don't stop SIPs of mutual funds and monthly recurring deposits. You lose out on the compounding benefit of return on return. The best way to beat inflation is to earn higher returns over time.
Don't liquidate investments to enjoy a comfortable lifeduring a price hike. The purpose of investing is to meet financial goals. Liquidate the investment only on attaining them.
Many youngsters postpone investments as most of the income is consumed by high prices. This is a fallacy. The magic of compounding makes sure even a small regular investment grows into a sizeable corpus with time. The investment can be scaled up as income grows in the future.
Look at price hikes as a blessing in disguise. Price hikes encourage saving, borrowing, investing and spending in a smart way. Avail the services of a financial advisor to make the right financial choices when prices go high.
Be Wise, Get Rich.
C.S.Sudheer, the author is CEO and Founder at IndianMoney.com.