Financial planning and Inflation impact

Inflation in India doesnt seem to be reducing at all. Food inflation, overall inflation are in the double digits and all people are feeling the impact on their daily needs.

Inflation and Inflation forecast have a huge impct on our financial planning process. Lets see how.

Usually when you do your financial planning , people take a long term view of inflation and take it either as 5% or 6% per annum.

So lets take an example.

If you want to plan for marriage of your child  worth 10L today assuming that in 10 years the inflation rate is 6%, the same will cost 1790848 ( ~ 18L). If you do the same calculation for a period of 20 years it is 32L

Now if the inflation is running at 10% as it is today for the last two years the cost of the marriage now becomes 26L in 10 yrs or  67L in 20 years!!

So you can see the difference in the costs and the impact that it has on your pocket and hence naturally on your financial planning.The impact is not across all plans let it be for retirement, education planning, marriage plans, buying a house , etc

Increase in inflation can put your plans into whack by

1. Ensuring you need to save a lot more than what you earlier planned for
2. Either reduce your plans if you are not able to meet the saving requirements.
3. Postponing or ensuring you work for more time than initially planned.

To this lets add a bit more complexity.

Inflation is not standard across all categories. Today food inflation is running at 18% which is much higher than the overall inflation in the economy which is at 9%- almost double.

The inflation which makes sense to factor into your planning is the inflation forecast for your particular plan commodity.

Here are some examples.

Education costs are going up exponentially. I mean 10 yrs ago when i did my MBA from IIM, the cost of the 2 year programme was 1.8L . Today it is at 7-8 L which translates to at 16.5% rate of inflation!! far from the 6% that you initially booked into your plan!!

Cost of housing- over the last year house prices have gone up by 15- 20% across India-- that is the rate of inflation that you should factor into your plan for buying a house.

Yes- this is daunting and if the long term inflation does not start to come down and it doesnt look like that is going to be the case anytime soon- especially with the rise in commodity prices across the globe, we need to factor this in your financial planning. Go back to basics- because this is the time!!

As my dad always says-- understanding the problem is solving it 50%!!

Some older posts on inflation and financial plans

Deflationary savings environment
look to understand


Happy Investing!
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