Influence of Inflation in Financial Planning: Necessity of Regular Financial Check-Ups
Key Takeaways:
- Just saving your salary won’t help you go through.
- It is important to consider inflation as a factor to adjust your financial planning accordingly.
- Global inflation in 2023 is estimated to have reached 6.9 percent.
- Diversifying your portfolio and industrial stocks helps to make your portfolio inflation-proof.
One day while shopping at the supermarket you may have come across your favorite snack aisle. While picking your favorite cookie you may have noticed that the price of your cookies cost more than what it was a few years ago.
That is why planning your financial savings should be regularly checked and adjusted according to current inflation. Increasing prices will adversely affect the interest earned on your investments, so in this condition, you are required to diversify your investments.
In this article, we will be sharing our valuable insight on why you should really consider inflation as a big threat to your financial planning and how you can make your portfolio inflation-proof.
Why Does Inflation Play a Vital Role in Financial Planning?
With the rise of inflation, it has eroded the purchasing power of rational consumers. As an investor, you have to strive for a better rate of return to fulfill your demands.
Several factors lead to inflation such as shortage of supply, fiscal policy, increase in money supply, and increase in demand. And to tackle these issues prices of goods and services are increased.
Now imagine your monthly income is $500 out of which you spend $100 on monthly bills, $50 for Giffen goods (bread, rice, etc), $200 on loans and EMIs, and remaining for investment. Now if suddenly the price of Giffen goods increases to $100 people will still buy it because it is a necessity.
But it decreases the share of the amount for investment. Investors also have to consider the average inflation rate, central banks often increase interest rates but also increase loan rates as well. With the increasing inflation rate, the price of currency decreases so it is important to make informed choices as surviving just on your salary won’t work.
How to Make Your Financial Planning Considering Inflation
It is important that your portfolio should be risk assessed which means if one sector of investment is failing then the other sector should be well equipped to cover that loss.
There are several ways through which you can make up your financial planning so inflation won’t affect your portfolio.
Mutual Funds
In the past couple of years, mutual funds have shown a good rate of return. If you are looking forward to long-term gain then investing in mutual funds might help you.
Bonds
Bonds are the perfect instrument that wards off the effect of inflation. Instruments such as Treasury Inflation Protected Securities are tied to the Consumer Price Index (CPI). So as inflation increases the value of bills increases. And if the inflation decreases you’ll get the original amount on the bills.
Precious Metals
Precious metals such as gold and silver are an evergreen investment as their price goes up year by year and can give you better return rates.
Why to Keep Regular Check on Financial Planning
If we just ignore inflation for a moment, there are several other dynamic factors that make us check our financial reports every time. The sudden shift in government expenditure and investments is also an important factor to consider while investing.
A common person has some proportion of debt and some proportion of equity and if we talk about a portion of debt then it affects the borrower in a lot of ways, both negative and positive.
With the increase in prices, the amount of loans required by borrowers will also increase. That is where as a rational consumer you have to make informed decisions, you need to understand whether secure loans for bad credit is a viable option or not. This is when you need NinjaCard signup, so that you can get better clarity.
The higher prices benefit both lenders and borrowers, with higher prices the lender will lend extra cash to borrowers. Suppose a real estate costs $25,000 dollars and after inflation, it costs up to $30,000. Borrowers will earn interest on those extra $5000 without increasing the interest rate.
With the increase of payable interest as a borrower, you have to consider your expenditure and other proportions of your finances as well. That is why you should keep regular checks on your expenditures and savings.
Conclusion
Inflation adversely affects your retirement planning and debt management strategies. In today’s dynamic economy, it is important to be financially sound and not just rely on your salary as a source of income.
Mitigating the risk of inflation is really important to avoid any mishaps in the future. Regularly reviewing and adjusting your financial planning is the key and with the right financial guide, you can safeguard your financial health.
FAQs
Ans: Skimplation is a reduction in the quality and quantity of goods and services provided by businesses at the same price.
Ans: Inflation leads to an increase in the price of commodities, an increase in interest rates, slow economic growth, and a depreciation of currency value.
Ans: Although high inflation is generally considered harmful, many economists believe that slow-paced growth is beneficial for economic growth.
Ans: You can calculate your real income by using this simple formula:
Real Income = wages – (Wages x Inflation Rate)
