Tips for planning the household budget: be an aggressive investor to beat inflation

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Managing the household budget is a difficult task in most circumstances. There are always expenses that stealthily rise and others that suddenly rise. And that ends up eating a much larger part of the budget than expected. This ends up impacting another area of ​​spending. As the latest consumer price index inflation data shows the retail price inflation rate has fallen to 4.28 percent, the lowest in five months, there is news concerns due to rising crude oil prices. Brent crude has already crossed $ 71 a barrel. And if it continues its journey north, things could get worse and put a dent in the household budgets of many people.

Oil price surge: India imports the majority of the crude oil it uses and is therefore always exposed to fluctuations in international crude oil prices. After a prolonged period of low prices, the major producers of crude oil, the Organization of the Petroleum Exporting Countries (OPEC) and Russia have agreed to production cuts in order to push prices up leading to a sharp increase in the price of oil. bill for imports from Indian oil companies. These last months.

In addition, the prices of gasoline and diesel have been deregulated. This means that the oil marketing companies are free to set their own prices. There is no government intervention in this matter and prices at gasoline pumps are also set daily. Previously, price changes were announced every two weeks. It is now done. Thus, the impact of international price movements is perceived more quickly than before.

Under the radar: Since the fuel is refilled after an interval of several days, and for some, after several weeks, the evolution of prices is often ignored. It may only be at a specific stage that people realize the kind of change that has taken place. This kind of inflation, which happens under the radar, is one of the most dangerous parts of the equation. By the time we realize the impact on the budget, the damage is already done.

There is also an indirect impact: Rising diesel prices may not appear to directly affect many households, but there are other dangers as well. The main impact comes in the form of a higher transport cost on the goods that households use regularly. This cost is passed on to customers. The greatest impact is seen on foods like vegetables and fruits. Even when the wholesale prices fall, there is no corresponding change in the retail prices because the transportation costs ensure that there is a significant difference between the two prices. A look at food inflation is a clear indication of the situation as it is one of the most volatile numbers in the entire basket of goods. And he jumps and falls in great steps.

Hidden impact: One of the dangers of inflation is that it is also very difficult for a household to measure. Looking at the retail index numbers doesn’t mean anything to a normal household because the inflation they face is completely different. The composition of their consumption basket determines their inflation and it will not be similar to that of the consumer price inflation index. At the same time, there are many areas in which households spend large sums like rent, school fees, etc. may not be correctly represented in the indices. So there is a very good chance that your household inflation is much higher than what the numbers suggest.

Budget objective: Tackling this kind of situation is not very difficult for an individual, but the basic condition for it is to keep a tight budget. It is a must have for every household. A budget will let a family know how much to spend on a particular area. A surge in the price of an item will lead to cost overruns. But as a budget is maintained, the family will notice and can take action, either controlling costs or allocating more funds to this area.

It is essential that an amount for contingencies be set aside in the budget to deal with such price increases. This is essential so that other activities are not disrupted due to a sudden change in the budget. This amount can represent around 7-10% of the total budget, so that the available figure is sufficient to cope with the evolving situation.

There should also be close tracking of expenses and prices when shopping, as this will immediately bring out big changes. This will allow for quick action, which in some cases could also be lower consumption. If, for example, there is a constant increase in gasoline prices, one could consider using the car only for essential trips and try to reduce some of the use in order to stay within budget.

Keep investing to beat inflation: The key element in the whole fiscal year is that at no time should spending encroach on the savings element and disrupt the individual’s investment plan. For many people, the investment made each month comes after spending, so there is a good chance that there is no more money to invest. The way to go about this is to make the investments a fixed part of the financial year and then make sure that the total expenses are limited to the amount available.

At the same time, one must also have good exposure to different asset classes to be able to beat inflation. This means that a traditional debt portfolio will no longer work. You have to try to get the most out of debt investments, even through debt-focused mutual funds. Equity exposure is also essential in a way that is suited to the appetite for risk taking as well as the goals of the individual. Trying to create a safe portfolio should be abandoned as stocks are the best way to beat inflation.


The writer is a Mumbai-based financial planner

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