How to Beat Inflation with Some Solid Financial Planning

By | July 4, 2015

Gold ingots and coins

Uncle Scrooge from The Duck Tales had a tower full of golden coins just so that he could swim in them. His miserly ways made him rich beyond his dreams, and yet he remained miserly. We’d all love to have enough money to swim in. But, Uncle Scrooge belongs to a much earlier time, and his tower of gold may not be able to survive today’s inflation rates.

With an annual income of 1 crore, you may be rich if you live in a small city, but that may not be the case if you are live in a city like Mumbai.

Take the the case of Mohan, a typical government servant with a steady but not so happening career. With a retirement corpus of 20 lakhs, he thought he could lead a happy retirement life. But he realized that 20 lakhs was nothing when his daughter got married. After the marriage expenses, he was left with just 5 lakhs.

Mohan was very prudent with his spending, yet he lacked financial planning. He didn’t plan his finances in a way that worked for him optimally and didn’t keep in mind the possible inflation.

Let us compare a typical financial scenario ten years ago and now:

Heads Expense in 2005 (all figures in INR) Expense in 2015 (all figures in INR)
Rent (monthly) 7000 15000
Grocery expenses (monthly) 2500 5000
Travel expenses (monthly) 1500 5000
School fees (monthly) 1000 2500
Electricity (monthly) 550 1050
Telephone bills 800 2000
Medical expenses (consultation fee) 100 500
Clothing (average cost) 350 1000
Higher education (average cost of a professional degree) 500000 2000000
Cost of a flat (average cost of a3BHK) 2000000 5000000
  • Figures taken are for illustrative purpose only, considering the average price variation in a Tier 2-3 city

What does this show?

Good financial planning is not just about saving and investing, like Mohan followed. It is based on possible price hikes.

Once we retire, we live on a fixed income. This means that even if you can afford your lifestyle today, you have to think forward about what’s going to change over the next 10-20 years. This is because inflation manages to creep up on us over time, as we get into the groove of our spending and consumption habits.

The Inflation Effect

Inflation hits us from every angle. Food prices go up, gas prices rise, transportation prices increase, and the cost of various other goods and services skyrocket over time.

The Consumer Price Index (CPI) in India has witnessed an increase to 120.70 Index Points as of April 2015 from 120.20 Index Points in March 2015. This means that the money lying in our bank accounts or debt funds is actually losing its value unless the returns are enough to beat inflation, which is rising at around a rate of 7 to 8% annually.

One could have hoped to purchase a second hand car with Rs. 1 Lakh, 10 years ago with ease. With the rising inflation, with the same amount today, one may need to settle for a new bike instead.

The price of common medicine, like aspirin, has almost doubled in less than five years now. So we can just imagine how the other medical costs are climbing.

A good management college today charges a tuition fee of around 7 to 10 Lakhs per annum for a degree. Considering that inflation keeps on rising by 5% each year, the same course will be available for almost Rs. 16-20 lakhs in the next ten years time.

A decent hotel accommodation for a family was possible for Rs.2000, 10 years ago. Today, Rs.5000 for a simple room is normal.

All of these factors make it absolutely essential to plan for the huge impact that inflation can have on your long-term savings and plans towards your twilight years.

Your savings should be put in financial instruments that bring you returns to meet or beat inflation. As inflation for different categories stands at different rates, against the popular misconception, we should consider the higher percentage and work for it.

Many people set an arbitrary goal of 1 crore to retire. But how much will 1 crore be worth when you retire?

3 Quick tips for Combating Inflation:

  • Think long term and start early
  • Keep a good mix of equity and capital protection
  • Update your investment strategy regularly

Uncle Scrooge’s tower for gold coins isn’t actually possible, but it is possible to have just as comfortable a life with enough foresight and planning. Just cross your fingers and hope that you don’t end up with three troublesome nephews like Scrooge did. Or maybe you’d secretly love having them around and being able to take care of them, just like he did.


YOU MAY ALSO WANT TO: Find out if your investments are working up to that gold pile – SIP Calculator


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