INVESTMENT: Inflation and taxes are money's enemies

The money we have or use is only relevant as long it is self-sufficient. For it not to erode it’s effective purchasing power over time, it needs to be invested sensibly. Money, the most effective and practical tool to help achieve our family goals, responsibilities, dreams, fantasies, whims and fancies, has two allies and two unavoidable enemies. The friends are, compounding of returns and investments in equities. The foes are inflation and taxes. In fact, how much money a person will have at retirement depends less on his inflows and more on his attitude towards money, how well he understands the dynamics of money (friends and foes). 

Billy Graham’s quote is so fitting and profound in this context. He says, “If a person gets his attitude towards money straight, it will help straighten out almost every other area in his life.”

Inflation hits all of us, it’s like the weather- it takes no feedback. But does it hit all of us equally? No, it will actually depend on the quality of goods and services we consume. For most of us what matters is not CPI, but lifestyle inflation. A consumer price index (CPI) measures changes in the price level of the basket of consumer goods and services purchased by households. The annual percentage change in a CPI is used as a measure of inflation. 

While the average inflation in India in 2018 has been 4.77%, lifestyle inflation which indicates the rise in your lifestyle expenses, is what you need to consider even if the headline inflation is not soaring.

Life style inflation can be explained as, when our disposable income increases, we tend to acquire certain expensive tastes and desires. This is also a function of the growth in availability of a number of options. It is no more just an urban phenomenon. In short, this is the price we pay for purchase/use of goods/services which we desire. Lifestyle inflation would be in the range of single highest digit and lowest double-digit number. 

Taxes, the less said the better, are the means to contribute towards the government’s job of nation building. 

Our investments need to surge ahead of these two necessary evils by at least two percentage points for us to be in the race. If it’s not happening, we need to be concerned. Even if our investments are experiencing ‘treadmill behaviour’ (working, but not going forward) we need to alter our investing practice. The change in investing dynamics may call for: 

(a) Enhancing inputs (investment amounts) by either increasing inflows or by tightening our belts by budgeting our outflows, 

(b)Making part investments in long-term asset classes like equity (while keeping an eye on accompanying volatility) thus ensuring that overall returns of the investment portfolio move up by a few notches 

(c)Initiating the investment journey as of yesterday. Taking baby steps is fine but the process has to start at the earliest. As is said, well begun is half done.

The second friend namely, equities work best in terms of risk-adjusted returns for a long duration (at least seven years). 

In a nutshell, to effectively nurture our wealth, we need to control the controllable. Inflation can’t be helped and taxes can be reduced by a limited extent. Therefore, it is extremely critical that we strengthen our bonds with the friends of money. 

As investment expert Dave Ramsey says, “You must gain control over your money or the lack of it will forever control you”. 

The writer is founder partner of Srujan Financial Advisers LLP