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How to Deal with Inflation and Rising Interest Rates

How to Deal with Inflation and Rising Interest Rates

  • By Saral Credit
  • July 07, 2022

Acche Din’ is a common term that everyone waits for forever!

For some, this term means free services. However, most people relate this term with decreased inflation, which will directly impact the prices of daily-use commodities and lower interest rates.

Unfortunately, inflation never decreases as expected; hence, you always prefer to find a way to deal with inflation and increasing interest rates.

Inflation in the GDP means the prices are going high. E.g., 5% inflation means you will now have to pay Rs. 105 for the same item that was priced at Rs. 100 a year back. Inflation never sticks to one count. Instead, numerous factors influence it!

Above all, the increased inflation strongly impacts middlemen's pockets, directly affecting their savings, budgeting, and monthly expenses. So, below we are sharing some practical tips for dealing with inflation and rising interest rates.

Plan Your Shopping in Advance:

Every month you prepare a budget that includes your entire expenses for the coming month. Checking your inventory and preparing a list of essential items is a smart move to combat inflation. When buying groceries, you should find deals and offers that can save you money and give double benefits at one price.

Crucial Note: Never visit the grocery empty stomach.

The reason behind this is that with an empty stomach, the possibilities of buying unnecessary items become high, draining your money and creating hurdles to counter inflation smartly. If you are a compulsive buyer, prefer carrying hard cash to limit your expenses.

Stop Running Behind Brands:

Countless people across the country are brand conscious. It means they are always fascinated by branded outfits and avoid checking the alternatives that can be an easy and economical replacement.

Undoubtedly, FMCG companies spend thousands of crores advertising their products and building a brand. This results in customers like you, who never look for low-budget alternatives and stick to brands. Brands are always linked with high prices, which means you are paying a significant amount for an item that is available at a lower price (with a local or no brand name).

Crucial Note: Paying for a brand is never a status symbol. It's more important to secure your future with the money instead of show off your status symbol.

Look for Offers & Sale Items:

Various products, commodities, and items are linked with amazing offers, deals, and discounts year-round. This brings a great opportunity for the buyers. Finding the right item during the offer and checkout to save money matters.

If you are a careful spender, you would always prefer buying items at a discount. However, if you are a compulsive buyer, you should surf the internet to find exciting deals that can help you save significantly on every purchase.

E.g., During the spring season, you would find a winter clothing sale that can save you up to 25-40 percent on every piece of clothing. Hence, such purchases are highly recommended to save money on your clothing and prepare for the coming season.

Buy in bulk if it is a NEED:

Every budget is bifurcated into three categories: NEEDS, WANTS & SAVINGS. You are often suggested to follow the 50:30:20 rule to make a smart move with these three categories and save for the future accordingly.

However, when we talk about NEEDS, you should always have a track of big discounts for items that you need every month. Every item under NEED can be purchased in bulk if you find a significant price drop. This will help you save from price hikes in the coming months. E.g., Wheat, Ghee, Sugar, etc., which is a necessity for every month.

You can check out your groceries and find the essentials that can be purchased in bulk to avoid a price hike.

Manage Your Saving Account Money:

It's a false belief that saving money in your savings account can help you beat inflation. Instead, the savings account degrades its value with time. This is because the amount you save in your savings account grows by about 2-3 percent. However, the inflation is nearly 5 percent, which means you are still 2 percent behind the current value.

Let's understand this with a simple example.

Suppose you have Rs 100 saved in your savings account. Moreover, you can use Rs 100 to buy an item X. After a year; the inflation rate becomes 5 percent. It means you now require Rs 105 to buy the same item (X). But, saving the amount in the bank will result in a total of Rs 103 (3 percent interest). This brings you a loss of Rs 2.

Hence, the right option to beat the inflation and high-interest rates is finding an investment opportunity that can populate your wealth more than the inflation rate.

Make an Investment Plan for Equities:

Undoubtedly, the interest rates are going high, and so is inflation. This doesn't mean you will lose the wealth with time. The right investment strategy will help you cope with the high inflation and interest rate. Instead, the smart investment will even help you beat inflation and make money.

Investing in equities is one of the most practical options to provide you with nearly 15 percent of returns. Equating to inflation, you will undoubtedly get a wealth hike of 7-8 percent, which is still a great practice to multiply your wealth.

Remember, investing in the stock market is risky and can take your wealth to zero. But diversifying your investment in equities, debts, bonds, etc., can help you minimize the risk and still earn a significant profit.

NOTE: Regardless of your risk profile, you should invest at least 10-15% of your investment sum in equities.

Save Tax Wherever Possible:

Everyone must pay the tax based on their annual income and tax slab. The tax amount deducted from your CTC is a significant portion that most of you would never love to cut.

Most people prefer making investments to beat inflation, but they also look for smart ways to save money that can be used for additional purchases. Interestingly, multiple opportunities can help you save a significant tax amount from the deduction.

Saving tax from your annual salary is one aspect of your financial journey. However, you should also know that saving the tax on your investment profits is another aspect. Here, you must know the taxes on the profit earned from stocks, mutual funds, etc. Long Term Capital Gains, and Short Term Capital Gains, are the two taxes that are imposed on your profit amount.

You must learn how you can save your profit from these taxes. The Rolling Concept is a great idea that can help you eliminate long-term capital gains.

Make a Lump Sum Investment in Loan Accounts:

Paying high-interest EMI isn't good practice if you can minimize it. Increased interest rates will increase your EMI or repayment tenure if you have an ongoing loan account. With a small increase in basis points, your repayment tenure can increase by at least one year.

The best way to deal with increased interest rates is to pay a lump sum in your loan amount and minimize your principal. Yes, paying your principal amount will help you decrease the EMI or repayment tenure.

You should continue paying your EMIs regularly. Moreover, you must also save money and deposit it in your loan account once or twice a year, based on the facility provided by the bank.

Paying a lump sum amount to your loan account will significantly reduce the principal and help you clear the loan quickly.

Request Your Bank for Low Interest Rate:

When inflation is already affecting your expenses, you should reach your bank to get some relief w.r.t the interest rate. You can ask your lender/bank for a lower interest rate that will help you minimize the EMI burden and give you enough funds to invest in various opportunities.

You should note that not all banks will approve your request. However, you can get some relief based on your credit score, financial reputation, and relationship with the bank.

If you are already running a loan account on a floating interest rate, you can check the current base rate and decrease your current rate with a small one-time payment.

However, you can check out other banks and negotiate with a lower interest rate if needed. Once satisfied, you can switch your loan account to a new bank/lender.

Prepare an Emergency Fund:

Lastly, you should put effort into preparing your emergency fund. An emergency fund is essential to take care of your daily living in case of financial challenges. It's recommended to prepare an emergency fund for at least six months.

You should prepare an emergency fund before diversifying your investment across different investment options. Once your rainy day fund is ready for at least six months, you can start investing the amount across equities, debts, bonds, etc., and make a profit.

With the above tips, you can beat inflation and tackle high-interest rates smartly. These points will help you prepare for the future and maintain your present-day finances in a better way.

Also ReadExploring the Major Effects of Inflation on Borrowers