How does inflation affect your savings, and how can you plan to protect them?

Worried about how inflation will affect your investments, and what you can do about it? We look at four ways you can fight inflation while saving.

Gone are the days when one person used to earn for a whole family and had one single job on hand to provide for their family. Today, one job is far from enough, and saving a significant amount of money is even farther from effortless. From increased rents and house prices to petrol and even food, everything is contributing to a soaring cost of living.

While saving, one of the important factors to keep in mind is inflation. Products and services that cost $500 today could cost $550 next year, and even more in the upcoming years. This is the effect of inflation. In this case scenario, saving is the bare minimum you can do; investing smartly is the actual fruitful step toward financial growth.

The most strongly negative aspect of inflation is that it weakens the purchasing power of money. It limits people’s access to products and services, thereby making their survival difficult. For example, you have a 100 rupee note. And over one year, if the inflation rate goes as high as 8%, the purchasing value of your 100 rupees will be 92 rupees.

Four ways you can fight inflation when saving

Possessing healthy financial habits in advance can help you to deal with the rising values of commodities. Let’s go through the ways to mitigate the impact of inflation when saving.

1) Be clear about your goals

This is the first step towards investing thoughtfully. If you have a family, and you’re looking forward to plan for your child’s education, your retirement plans, as well as healthcare-related costings; you can start calculating the amount you need to take care of these life goals (considering future inflation in mind). 

If you’re in the earlier stages of life, it is even better. It is more than desirable to start investing when you’re free from liabilities, while having a source of income.

2) Build an investment strategy

There are multiple tools for investing money; starting from fixed deposits (very traditional/but not very attractive), mutual funds (reliable and profitable/but still fall under traditional investment criteria), and direct equity.

If you are inclined towards direct equity trading, it is important to have full knowledge of the risks and ways to deal with them. While they are risky, equities can give impressive returns over a long period. 

Over the last decade, the Nifty has given an ROI (return on investment) of 16.7% a year compared to the 7% average inflation rate. However, trading directly in stocks is not for everybody. In that case, you can rely upon mutual funds to gain similar returns over the long term.

Mutual funds, on the other hand, can be a more balanced option if chosen wisely. 

3) Diversify your investment portfolio

As they say, never put all your eggs in one basket. If you choose to invest a large sum in one particular stock or one systematic investment plan (SIP), it is possible for a cycle of recession or a bearish period to tank your investment. We can’t enable that to happen to our hard-earned money. It is better to opt for a set of investment options for a large amount.

Additionally, while investing, you should always keep some money back in an emergency fund. This can be in your normal savings bank account.

4) Differentiate between your needs and your wants

You’ll be able to invest only when you save. So cut back on unnecessary spending, and be responsible when it comes to your finances. It’ll be tough to decide what’s ‘unnecessary’ for you, but eventually, you’ll work it out. It is also advisable to avoid taking out huge loans for things that may turn out to be a liability (for example, cars, fancy weddings, etc). 

Many people consider gold and real estate properties as an investment. While it’s not an entirely wrong choice, it is not as immune to inflation.  

Financial stability amid inflation is a tough nut to crack. But with patience and making the right decisions at the right times, we can achieve it.

Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She’s been money-wise from a young age and has always shared her knowledge and tips with those around her.