Five tips to protect your savings against Inflation

An old enemy of Indian savings and investors has returned with the increase in inflation to 5.88% in December 2022. Your standard of living and the value of your savings are undermined by inflation. Inflation is the general increase in the prices of goods and services. Below are the 5 strategies to counter inflation.

Are long-term deposits good for you?

Long-term fixed deposits provide a lot of security, but it takes a hit when inflation is taken into account. Rates of return on investment need to be considered while making long-term investments. For instance, assuming the highest effective income tax rate is 31.2%, excluding surcharge, the post-tax
return on a 10-year fixed deposit that pays 6.75% interest comes out to 4.64%. The real rate of return is 0.02% if you divide this corpus by the current inflation rate (5.88%). You need to achieve a true rate of return that is positive and over 1% for long-term investments to be successful. When inflation is on the rise, minimizing your long-term exposure to guaranteed products is a beneficial option.   

 

How can you inflation-proof your rent?

When inflation creeps up on you as a landlord, a multi-year tenancy agreement that fixes the rent in advance might make you poorer. For instance, paying  Rs 20,000 each month for three years for rent won't work. Therefore, to ensure that your rental agreement is inflation-proof, include an inflation clause. Given the rising prices of commodities, you would want to pay as little rent as possible as a tenant. While negotiating with your landlord in this circumstance may be challenging but it's important to do so in order to maintain affordable rents during times of low inflation. 

 

Do equities offer a reliable investment option? 

Corporate earnings determine equity returns over the long run. As companies increase the pricing of the goods and services they offer, these earnings gradually compensate for inflation. As a stock investor, increasing inflation won't affect you in the long run. You could, however, encounter volatility in the near future. Keep your stock holdings for at least five years.

 

What about gold and international stocks?

Gold gives long-term protection against inflation. Due to limited supply, the price of gold rises along with an increase in prices generally throughout the economy. However, you shouldn't invest more than 10% of your portfolio in gold. Due to the fact that international equities and mutual funds that participate in foreign markets are linked to foreign currencies, these investments can provide greater inflation-adjusted returns. When India's inflation rate surpasses that of the other country, foreign currencies gain value relative to the rupee.

 

Should you repay the loans?

The rise in consumer price index inflation will eventually increase the cost of your loan because rising interest rates often follow rising inflation. Additionally, the RBI has mandated that banks link the interest rates on house loans to external benchmarks like the repo rate. As a result, higher rates will hit you more badly. You can avoid paying higher interest rates by making early home loan payments. However, evaluate the expenses and benefits of paying off your loan early before making a decision as prepayment may incur penalties.

 

Conclusion- Investing in yourself is by far the greatest investment you can make to be ready for an unpredictable financial future. It will boost your confidence as well as your current income in the future. This investment starts with high-quality education and continues with keeping the current skills and picking up new ones that will match the ones that will be the most in demand in the not-too-distant future. Being able to adapt to a business's shifting needs could help you protect not only your career but also your salary against inflation and economic downturns.