Bangladesh witnessed a 9.52 per cent inflation rate, the highest in 12 years, in August 2022. Naturally, the citizens of Bangladesh have been suffering from high food inflation along with commodity prices and a stringent economic situation. While a person cannot change the macroeconomic conditions of Bangladesh, s/he surely can take action to combat inflation and keep his/her wealth protected.
Understanding own life style is crucial to plan out the impact of high inflation. Personal income and expenses vary from one person to another, and in the same way, personal inflation will not be the same for everyone. Without understanding which products or services take a toll on a person's expenses, it will be difficult to manage personal finances during high inflation times. The rise in expenses can give an idea of how much the costs have risen over the year, and that is the impact of inflation on the person. Looking at the categories of expenses can be an eye-opener and will help to evaluate what changes need to be made to reduce expenses and increase savings during high inflation.
In addition to knowing how a person manages expenses with the income earned, it is important to understand his/her net worth. This way the complete financial situation a person is in can be assessed.
A detailed budget can put an end to missing payments and impulse spending. Ideally, a budget can be created that entails somebody's daily, weekly, and monthly expenses and how much s/he would like to save. This will limit overspending, cut off unnecessary costs, and remind the person of the irregular payments that s/he may otherwise forget, which might cost more in the future. Initially, it is good to save at the person's comfort level and then increase the savings by 15-20 per cent of the income. However, not every month will be the same, and thus it is necessary to review and try to cut back on nonessential costs and save that amount instead.
Next, it is vital to determine financial goals to allocate savings appropriately. It can be a short-term plan such as buying a gadget, planning a vacation overseas, or making down-payments for an apartment. A long-term goal such as retirement planning can be started early in a career so that the person has the time and the money to save. To make sure no saving opportunities are missed, automated transfers can be used. The timing, amount, and instrument of money transfers are all up to the person. S/he may even split the direct deposit so that a portion of each paycheck goes into the savings account.
People who are financially stable and have limited expenditures can follow the 50/30/20 rule. This outlines how much money should be set aside each month for savings and expenses: 50 per cent for needs, 30 per cent for wants, and 20 per cent for savings. Needs may include the monthly rent, utility bills, transportation, groceries, and any other costs that the person bears regularly. The costs that arise from wants, such as dining out, shopping, vacation, entertainment subscriptions (Netflix, Chorki, HoiChoi, etc.), non-essential groceries, etc., should entail 30 per cent of a person's income. The remaining 20 per cent of the income should be saved. In this way, not only the person will be able to save but also meet all expenses and enjoy what s/he loves to do.
An emergency fund goes a long way on rainy days. No matter how much income rises over the years, it's hard to demote one's standard of living. Thus, it is important to keep aside an emergency fund and find ways to boost it so that it can be an aid during high inflation times. Look for additional money to save whenever possible. Monetary gifts during festivals or occasions, tax refunds, cash back or rewards on credit cards, inheritances, etc. - all these can be put in the emergency fund. It's important to look at the bigger picture when creating this fund. Sometimes, this might lead the person to be sentimental about saving and restricting oneself to live his/her life to the fullest. However, distressed situations come unexpectedly and if one does not have enough money in his/her emergency fund, tackling an unexpected crisis will be extremely difficult.
Alternative income sources help to relieve financial stress in an unimaginative way. Working in Bangladesh is often not easy. Long working hours, low pay structure, and difficult work conditions get worsened by heavy traffic that makes commuting stressful. Amidst all these challenges, it is not easy to go the extra mile to increase income. However, many people have a passion quite different from the job they are currently in. Pursuing this passion can help a person earn additional income. For instance, a banker who has skills in interior design, can earn by seizing opportunities from online or friends and family. An analyst can earn on weekends by taking classes in Microsoft Excel online. An engineer who loves teaching, can pursue tutoring in his free time. After making sure that the side hustle does not create conflict with the person's professional work, s/he can seek a way to raise income in his/her own time by freelancing.
In this era of advanced technology, there are many opportunities online that will help one to earn through freelance work. Websites such as Upwork, Fiverr, LinkedIn, Designhill, Toptal, etc., can help a person find work according to his/her passion. Although the income source may not be regular, it will help people to earn outside their salary.
Communication is key here. It is beneficial to make connections with people from diverse backgrounds and keep looking for opportunities that can help to bring in income and increase savings.
Besides earning from a side hustle, a person can grow his/her wealth through investment in the stock market, mutual funds, savings certificates, and deposit pension schemes (DPS). This will avail the person of the opportunity for tax rebates. 20 per cent of the total taxable income can be invested in savings. A tax exemption of 15 per cent will be available on the allowable investment and thus allowing him/her to minimise the income tax expenses. Amidst varieties of investment choices, it is critical to assess the quality of the institutions before making any deposit.
Financial scenario beyond stable income in a nutshell to fight against unexpected situations. Not all information in the media is going to affect a person in the same way as it would do to others
With abundance of information on the internet, it is common to get overwhelmed and get stressed out about the impact of rising prices on people. However, the best way to combat rising inflation is to stick to the basics: find other income sources which will not create additional pressure in daily lives, reduce expenditure that is not needed now and keep investing in schemes that will help grow wealth over time. The solution to managing one's personal finances is to thoroughly assess his/her financial situation and create a realistic budget that's aligned with personal financial goals. Scrutinise a regular budget for unnecessary expenditures, manage debt payments to avoid unforeseeable costs, create an emergency fund, and save for retirement.
Personal finance is crucial to a person's well-being, and it is never too late to start and manage one's finances well.
Farheen Rahman works as Investment Analyst at UCB Asset Management Limited. farheen.rahman@ucbasset.com