If the government announces that India’s inflation is 5%, does it mean that every Indian’s expenses will experience inflation of 5%? The answer is no.
Government declared inflation is not personal inflation
Let’s take one example – a father whose son is in the first year of engineering. The family’s general annual expenses are Rs. 5 lakhs & the son’s college fee (in 1st year) is Rs. 1.5 lakhs. So the total expenses are Rs. 6.5 lakhs.
Now suddenly the college decides to increase the fees to Rs. 2.5 lakhs from the 2nd year onwards.
The result?
Family’s overall expenses shoot up to Rs. 7.5 lakhs. That is an increase of 15.4% over the earlier 6.5 lakh. And if government now says that the inflation is 5%; then you know that the father in the case cited above would disagree.
This is just one example where inflation of one particular expense can derail the family’s budget.
Remember – the real inflation that your clients experience is different from what the government tells you.
And if possible try this exercise yourself to find out your personal inflation. You might be surprised.
But why so much fuss about the inflation?
Even if what RBI tells you about inflation isn’t true for you, why does it matter and why should you be bothered?
Let’s try to address that…
So government told you that inflation is 5%. But you did some analysis (like above) and found that it is closer to 12% for you.
This means that if you are saving money for future then you need to find investment options that give more than 12% & not just 5%.
So if your clients have a fixed income giving them 7% then it won’t work as your inflation is 12%.
And this is why it matters!
What is happening is that your post-tax returns are less than your clients’ personal inflation. Your clients got to beat inflation in the long run if they don’t want to run out of money in later years.
Even in financial planning, it is of utmost importance to anchor inflation expectations to realities of the lifestyle of the person being planned for and not just on the available inflation data.
Suppose your 40 year old client plans to save for retirement. His current monthly expenses are Rs. 50,000. And depending upon how much his future expenses will be, the retirement corpus would be calculated.
Higher the expenses, bigger the corpus requirement. Bigger the corpus requirement, more they need to save going forward.
This is the reason why understanding your clients’ real personal inflation is so important when recommending for long-term goals.
Hence I would request each of you to consider inflation adjusted returns and ensure their investments help them at least beat real inflation. Depending on how early your clients understand this basic concept on inflation, longer will they enjoy the benefits without having to think about your longevity.
Rishabh R. Adukia is a Chief Advisor at Nine Cube.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
