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If you are looking forward to financial security in future, you must eliminate the deadly effects of inflation on your budget. To know how, read this article.
If you’ve recently gone out to buy groceries, petrol, gas, etc., you must have noticed how fast the prices are escalating. Inflation is breaking records from the last decade and is expected to continue doing so.
Inflation is an economic phenomenon caused by an imbalance in supply and demand. However, current inflation is a danger of both demand side and supply side inadequacies.
On one hand, the lost demand due to the pandemic is still far from being fully recovered, and on the other hand, the supply crisis of oil due to the ongoing Russia-Ukraine crisis adds insult to injury.
All this has resulted in a daily spike in prices, making life difficult for every section of society. Inflation has one direct impact on us- it takes away the expectation of financial stability in the future. One thing that can currently be bought for ₹20, may become worth ₹50 in the future.
So, how should you manage your finances in such a scenario? Many of us lack experience of saving, spending, investing, and budgeting in a high inflation environment. But at this point, no risk seems to be affordable and a clear financial set up is necessary.
Therefore, you need to subtly plan how much to spend, save, and invest. Remember, savings alone can’t hedge you against inflation. Only if you invest properly and save enough, will you be able to shield your wealth from the degrading effects of inflation.
Here are 5 things you must follow in order to secure your financial health in future:
1. Make yourself a reliable budget
If you wish to control your finances, the first step is to create your budget. It will make it easy for you to keep a check on your expenditure habits and alert you if you are a reckless spender.
In case you don’t wish to completely track your finances, at least note down where you spend most and compare prices between two months. You will be surprised to see major differences in prices just by a factor of a few months.
The next step is cost cutting. Once you have figured out where your money goes, you must figure out a way to control it. Try looking for unnecessary expenditures and cutting them. If you find it difficult to completely exclude those items, try spending the least on them.
One of the best ways to cut costs on groceries is to look for nearby and cheaper substitutes. Just a little alertness can save you hundreds of bucks!
2. Get rid of the debt to get a clear picture of your finances
Many of us forget how important it is to keep paying off debt on the priority list. We generally tend to put it at the bottom and decide to pay whatever will be left at the end of the month.
However, this stretches your debt and it ends up taking more time to repay than it actually should. In order to secure your financial health for the future, you must consider getting rid of whatever debt you have as soon as possible. You would not want to waste money on it in the long run. Hence, end this loop now only.
Especially if you have variable debt- that is credit card debt, variable rate mortgages, personal loans, lines of credit, etc.- You must keep paying these off directly next to your budget set up.
Before you start investing, make sure you are not carrying the burden of debt and investing itself may be risky and you wouldn’t want to lose your money for nothing.
3. Set aside funds for emergency
As prices surge to their highest, many of us might get tempted to invest in the best deals possible. However, before you jump in the risk business of investment, consider keeping some funds aside for the rainy days of your finances.
This is because not every investment may be successful and in order to deal with many major catastrophes in the investment market, you will need some funding source.
Also, to make sure that your regular budget doesn’t get tense due to uncertain situations like health issues or say festivals, you need an emergency fund.
Taking loans in already tough times makes no sense and precaution is always better than the cure. Make sure that you choose some high yielding savings account to maintain your emergency fund.
Even though it may lose value due to inflation, it will still be far better than having nothing during an immediate financial emergency. Ensure that you keep aside enough to carry on at least 5 to 6 months worth of expenses.
To know how to build an effective emergency fund, you can refer to this article.
4. Look for investment options- start with simple bond market
Now if you are debt-free and have enough emergency funds to carry on at least 5 months with no additional aid, you must start investing. Look for opportunities that are reliable, guaranteed and safe.
One of the options can be investments in gold. These are a great way to secure your money since you can convert gold into cash pretty easily.
You can also consider mutual funds, secured NPS, direct equity FDs, Post Office Savings Schemes, etc. In case you are a beginner in investment, try to keep your portfolio as simple and easy to understand as possible.
Avoid directly jumping into shares or risky ventures- try to invest in government securities or RBI bonds, which give guaranteed returns. A secured, small and yet effective financial portfolio is the key to your financial stability.
5. Consider investing in real estate like housing
Home prices are skyrocketing nowadays. For those trying to buy a new home, it is better to currently live in a rental accommodation and wait a little longer to invest in a home. For those already owning a house, investing in its maintenance can be very economical as returns that you’ll get will be enough to cover all those renovation expenditures.
Before buying a new house, try investing in your existing one and turning it into a rental property. This way, you can have an additional source of income. If not, you can even sell it and earn an amazing margin since the prices are expected to remain escalated.
Inflation is like a termite that gulps down all your savings without you realising it. Your money is losing value without any sign, and this could be a huge threat to your financial health in the future. In order to hedge your finances against inflation, you must consider creating a proper budget. Savings and investments shall immediately follow!
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