Tips to save money during times of inflation

On 12 December 2022, the Government released the Consumer Price Index (CPI) data for November 2022. The CPI is the inflation rate, which in simple words, is the increasing prices of goods and services over time (for example, year-on-year or month-on-month). The CPI inflation for November 2022 was 5.88% compared to 4.91% year-on-year. 

The average headline inflation may not depict the complete story, but individual and sectoral inflation can affect households hard. In such situations, relying on your savings may not be a wise choice as your expenses would increase significantly. However, if you apply for a credit card, you get several opportunities to tackle inflation in smart ways.

Read on to learn how to use a credit card and save money during the current high inflationary scenario. 

High inflation is a global phenomenon

In 2022, inflation was a global phenomenon and not just restricted to India. Major economies such as the US, the UK, and the European Union saw all-time high inflation rates. To control inflation, all major central banks across the globe increased interest rates.

The increased cost of living

The RBI also increased the interest rates in 2022 to control inflation in India. With a series of rate hikes, the repo rate increased from a low of 4% to 6.25% in December 2022. Banks passed on the higher interest rates to their customers, which increased the borrowing cost of all loans. Inflation also decreases the value of your savings.

For example, Kavita saved Rs 50,000 for her son’s school fees for next year. She invested the money in a fixed deposit at 6% p.a. for 1 year. Next year, the school increased the annual fee by 10% to Rs 55,000. Kavita got Rs 53,000 from her fixed deposit on maturity. So, Kavita still had to put Rs 2000 from her pocket due to the impact of high inflation of 10% in education fees.

Ways to save money in times of inflation
 

As an individual, you must have also felt the impact of inflation in some form, such as an increase in health insurance premiums by 15% or an increase in the cost of groceries by 10%, etc. You can take the following steps to save money during these high inflation times.

1) Calculate your personal inflation rate
 

Your individual inflation rate may differ greatly from the national CPI inflation rate. Hence, it would help if you calculated this. 

To do so, list the month-wise expenses you made last year and the current year. Then compare the increase/decrease in amount and percentage for each category and the total. This exercise will help you calculate your personal inflation rate for each spending category. 

If you have already been following monthly budgeting, you can get the monthly numbers (for each category and overall) from your previous monthly budget records. If you still need to, you can get the amounts for last year and the current year for big-ticket items from your bank statement and/or credit card monthly statements. These include money spent on categories such as: 

a) Groceries and daily use household products

b) Children’s education

c) Insurance premiums

d) Society maintenance

e) Property tax

f) Utility bill payments

g) Dining and entertainment

h) Fashion and personal accessories

i) Vacation, etc.

The personal inflation rate will help you figure out by what percentage your cost of living has gone up and what corrective action you can take. Also, if you need to follow budgeting, it is time to start doing it. It will help you assess where and how much money you are spending on various categories, thereby controlling things if they go out of hand.

2) Chop off the low-hanging fruit
 

In the earlier section, you calculated your personal inflation rate. You also know how much your living cost has increased in various categories. Now it is time to regain control of monthly expenses that have gone out of control in some categories. You can take corrective action as follows:

a) Stop dining out or reduce the frequency of dining out and instead relish home-cooked food

b) Watch movies on DTH channels or OTT platforms instead of going to the multiplex

c) In the case of subscriptions like OTT, music streams, magazines, etc. evaluate whether you are making the most of them. If not, switch to low-cost plans, explore alternatives, or stop them altogether.

d) If you take an international vacation every year, consider settling for a domestic vacation on a lower budget. If you already take a domestic vacation, consider revising the budget downwards or skipping the vacation for a year.

Follow a budgeting method like 50:30:20 budgeting. It helps you allocate your income as follows:

a) 50% needs

b) 30% wants, and

c) 20% savings and investments

The above budgeting method clearly helps you allocate 20% of your income towards savings and investments. It also helps you allocate 30% towards discretionary spending so that you can enjoy life rather than resorting to frugality.

3) Invest in assets that offer real returns
 

One of the best ways of fighting inflation is to invest in assets that can give you real returns. The real return is the return earned after adjusting for the impact of inflation. For example, if a fixed-income investment gives you a 7.5% annual return and the inflation rate is 6.0% p.a., the real return will be 1.5% p.a.

Historically, equities have given inflation-beating high returns in the long run. You should consult your financial advisor and invest in equity mutual funds for long-term financial goals such as building a corpus for a child’s higher education or your retirement. This can help you beat inflation and achieve your financial goals.

Ideally, you should have an investment portfolio comprising various asset classes such as equity mutual funds, fixed income, gold, real estate, alternative investments, etc.

4) Don’t settle for quoted prices
 

Another way to save money during high inflation is to plan and time your purchases. It would be best if you shopped during a sale. Adopt the following strategy:

a) Shop for groceries and daily use household products in the first week of the month when most online and offline merchants have a sale. You can club high discounts on MRP using credit card discount offers.

b) Shop for garments and personal accessories once a quarter. Most online and offline fashion merchants come out with a sale on occasions such as Republic Day, Valentine’s Day, monsoon, Independence Day, Diwali, New Year’s, etc. Club your purchases during a sale and benefit from high discounts on MRP and credit card offers.

c) Plan your vacation during a sale. Most online travel aggregators (OTAs) come out with a sale on flight tickets and hotel accommodations during such occasions. Do your vacation booking during the sale using a credit card.

d) Purchase big-ticket items such as consumer durables, electronics, and gadgets during the Diwali Sale. You will get the best discounts on MRP and offers on credit cards.

e) For movies and dining, you could look for credit cards with ‘buy one, get one’ (BOGO) offers. This way, you can save 50% of the cost.

f) For utility bill payments, look for discount and cashback offers from online merchants, wallets, or use credit cards, etc.

5) Leverage discounts, cashback, and rewards
 

You can earn reward points when you use credit cards for the purchases mentioned above, along with discounts and cashback. Credit cards usually give you base reward points (1 RP) per Rs 50 to 200 spent. 

IDFC FIRST Bank Credit Cards give you accelerated reward points i.e., 3x reward points for offline spending and 6x reward points for online spending. You also get 10x reward points for incremental spending above a specified amount (say, Rs 20,000) in a month and on your birthday.

The reward points are valued at Rs 0.25 each and never expire. They can be used to pay for online transactions or redeemed against gift vouchers of various brands. You can choose from a range of IDFC FIRST Bank Credit Cards based on your requirement and the card features and benefits. With the right use of credit cards, you can leverage a combination of discounts/cashback and rewards. They also provide interest free credit for a period of up to 50 days.

Beat inflation with a little bit of planning
 

While inflation is running high, you can plan and beat it better. The steps involve calculating your personal inflation rate, curtailing or cutting off some discretionary spending, saving money by shopping during sale events, and to use credit card to gain benefits such as discounts, cashback, and reward points. 

These steps will help you save money. The savings can then be channelled into investments that can potentially give inflation-beating returns, thereby helping you meet your financial goals.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.