The inflation levels over the last couple of years have been high and it is frightening to even think what would be the future value of money if the same levels continues unabated. There has been a tug of war between the RBI Governor and the Central Government with the former trying to convince the common man that by increasing the CRR, THE repo or the MSF rates, inflation would be contained.
It would be a myth to assume that increasing or decreasing such rates time and again would bring inflation down and consequent to that the lending rates would come down. It is not going to happen that way.
There are a lot of macroeconomic factors that are responsible for the continued or unmanageable rise in inflation rates. Since the onus to address these factors lies on the government and its policies, one man or a monetary policy cannot change the course of the unrelenting inflation levels.
If the problem is not contained or addressed on a war-footing all of us are going to be in real trouble. Under the given economic circumstances there is no real rate of return happening on the savings, which the inflation is eating into.
No savings
The annual increase in income has come down from a healthy 15 plus percentage to sub-10 per cent over the last five years, which has translated into no savings at all since inflation (CPI) continues to be in the range of nine to 10 per cent. Banks are finding it difficult to mobilise funds through public deposits (which is leading to poor credit creation) and are being forced to raise FD rates in an effort to encourage investments. But higher deposit rates leads to higher lending rates. It is a Catch-22 situation.
With stress on savings there is stress on investments. Contrary to what Warren Buffet has professed — “Spend after saving, not the other way round” — nobody prefers to invest first and then spend. A common man first thinks of meeting his personal and family spending needs and then considers the investment options if any money is left. Higher inflation levels eat into savings and investing capacity which leads to financial difficulties in the long term.
With every tinkering in the key rates (done by RBI through its monetary policy announcements from time to time) a bank/HFI would increase the lending rates for new borrowers or reset the rates for the existing borrowers who are on floating rates, thereby increasing the EMI burden. This too drains the saving and investment capacity of the borrower.
The biggest loser when such negative changes are passed on to the customer is the home loan borrowers, because their EMI outflow over the longer period gets severely affected, putting a strain on their savings and investing plans. Moreover, floating rates are usually applicable only for home loan borrowings and every increase in rates drains their saving capacity.
Are there solutions to these problems? Before we find solutions let’s first think of a real time future situation. If you are now 30 years old, married and spending Rs.20,000 per month on mandatory living expenses and if the inflation over the next 25 years averages about seven per cent, then when you are 55 years old, you would need a whopping Rs.1,08,549 a month to maintain the same current lifestyle. This figure is on the assumption that you would have completed all your other personal and family commitments and also adequately insured.
The plan
Now the question is how you would get this Rs.1,08,549 month after month, for another 20 years, if you live till you are 75 years old? If the bank interest on fixed deposits is at five per cent p.a. in the year 2038 (25 years from today) you would need a retirement corpus of approximately Rs.2.70 crore which would fetch you the required monthly income to meet your mandatory expenses.
If your risk-taking ability is eight per cent p.a. (investing in risk-free assets) then you would need to invest Rs.28,390 each month starting from this month to create a corpus of Rs.2.70 crore in the next 25 years. And if you choose to invest in opportunities that offer you 15 per cent (investing in risky assets), then you would need to invest Rs.8,300 each month to create the same corpus. The choice of assets is yours based on your income, savings and risk-taking capacity.
The monthly investment if you choose risk-free assets looks scary, isn’t it?
One of the foolproof solutions to substitute your monthly requirement when you retire would be to plan for rental income on your property by way of having residential or commercial property ownership. Given the present trend of constant increase in rentals the income one can earn over the future years would be quite handsome and would be a good source of passive income. So it is highly recommended that when you are still in the earning phase of your life invest in additional property, either by way of building an additional house if you are living in an independent plot or by way of buying an apartment, purely for investment purposes.
Consider the outskirts
One aspect you may bear in mind is that what seems to be an area that is on the outskirts of the city today would be part of the main locality in the future, which is quite obvious at the pace at which cities are growing currently. Hence, if you are able to negotiate and get an apartment on the outskirts at Rs.20 lakh to Rs.30 lakh today it would be worth considering investing.
A two-bedroom house which fetches rent of Rs.10,000 p.m. today could fetch about Rs.35,000 at five per cent increase each year in the future, which compensates for your retirement financial requirements. Moreover, even if you decide to sell the property when you are getting older it still would be worth creating a decent corpus to meet your old-age annuities.
Forget what RBI or the government is going to do on inflation and interest rates, you have to learn to insulate yourself from future financial hazards. You plan and settle down with a real estate investment over and above your self-dwelling one; it will sure be your saviour.
