What is the Fuss?

Inflation makes products and services costlier, every passing year. Inflation in India stands at around 5–6%/year (20-year average). However, this inflation, published by a national survey, is flawed. Yes, it is flawed. It is just an age-old formula, repeatedly used and published monthly. There are different forms of inflation in different areas of products and services we use. Some forms are scarier, where inflation causes the price to rise 10% or more every year. Home rentals, travel, education, and medical inflation are just to name a few.

Inflation eats away into your hard earned wealth. It impacts your financial planning. It might delay out your retirement plan, or play spoilsport to the long term goals you have set for yourself. We all prepare to beat the 5–6% annual inflation, the one we see and hear. But what about beating the inflation we do not see & hear? You need a plan before you realize its too late.

In this post, I talk about some common areas where inflation is way higher than 5–6%. And some ways to deal with them, like a Pro. Let’s get started.

Inflation hits hard, and it has many forms

By the time you reach your 30s, you start seeing the impact of inflation across multiple decades. A 2 BHK apartment whose monthly rent was around INR 15k in your 20s, is now available at INR 40k. The return flight to your hometown costs INR 7k in your 20s but now costs INR 16k.

You come to the realization, that, Inflation has many forms!

The typical inflation which is quoted, at 5–6%, is calculated basis a basket of goods. The majority of this basket is groceries, metals, machines, chemicals, etc. Read the article here on inflation calculation in India. Yes, your milk and vegetable prices rise by 5% annually. However these expenses are typically less than 5% of your monthly income. Hence, you are not impacted by this part of inflation. It is the other forms of inflation that impacts you the most. Next, let’s look at two forms of inflation where the annual price increase gets scarier.

Real Estate Inflation

Infra Development-driven Inflation

Real Estate prices rise between 7% annually. However, in some locations, the rise in real estate prices is abnormally high. When a Tier 1 company opens a brand new multi-floor office in an area, the surrounding residential society prices skyrocket. Yes, they increase from anywhere from 20 to 50%. The employees of this Tier 1 company, who get higher salaries, often prefer to stay close to their work to save travel time.

An example is how Amazon.com’s head office in Seattle, USA, drove apartment rental prices in the area to unbearable levels (read the article here). When Amazon planned its second headquarters in New York, it was not surprising that the city of New York rebelled. The local residents and lawmakers in New York pushed back hard, and they succeeded (read the article here).

But why does the opening of a large company office affect real estate prices? Well, such commercial buildings’ development is usually followed by the opening up of restaurants, bars, and malls nearby, as there are more affluent footfalls in this area. Similarly, the opening up of a metro station leads to a disproportionate rise in rental prices of nearby apartments. This is because close access to a metro station is preferred by apartment residents.

Post covid lockdown ended, rentals increased by 30-50% in some societies of metro cities. There have been instances where the existing residents were given the option of accepting the rental hikes, or to move out (read article here). A not so friendly situation to be in.

Changing Salary Levels causes real-estate inflation

Another reason for a disproportionate increase in real estate inflation is an increase in salary levels every 5–10 years. Every 5–10 years, the skill in demand in the market changes. There is more demand and less supply of this skill. This leads to companies offering higher salaries to these niche-skill workers. And slowing down the yearly increment of other ‘over-available’ skilled workers. Not fair, maybe, but it’s business.

In 2000–2010, coding skills such as C++ and Java were most sought after. In 2010–2020, app development skills (Android/iOS) became the talk of the town. 2020 onwards, skills supporting Machine Learning/AI/Blockchain (Python/ Solidity / Julia) are becoming the most sought-after, and the highest-paid ones.

This leads to instances when a person in his 40s, earns the same salary as a twenty year someone with a niche skill set. Ouch! Given the number of younger crowds with higher salaries, the demand for high-end rental options goes up, driving rental prices even higher.

Rise of high-income apartment dwellers — flatmates & working couples

The type of people seeking apartments has changed over time. Instead of living in PGs/hostels, fresh graduates stay as flatmates. A 3 BHK apartment is occupied by 3 flatmates, all earning a handsome salary. Hence, the collective spending capacity for paying the rent of 3 BHK goes up.

Another such rising category is working couples. If both the husband and the wife work, and are climbing the career ladder at a decent pace, then the total household income goes up. This enables the working couple to afford higher rental options.

Compare these cases, with a family where the husband is the sole earner. He provides for the rent for the apartment where his retired parents, in addition to his family of wife and 2 kids live. This household has 1 earner, and 6 persons living together. This family will have to move to a lower rental option, which matches its household income.

Travel Inflation

Traveling is no longer an occasional planned event. It has become a part of everyone’s lifestyle. Travel vlogs, blogs, and reels create intense FOMO which is difficult to escape.

Traveling has become convenient as well. Travel planning is easier done in groups. Many entrepreneurial agencies and small groups have emerged which take you in travel groups, and take care of planning, bookings etc.

Not only this, traveling has been portrayed as an important learning phase in one’s life. In order to acquire soft skills, experience the world, and get exposure to different cultures, people now consider travel essential. You wouldn’t be surprised to find some resumes mentioning a self-imposed travel break of 6 months or more, to experience the real world.

With so much demand, rise in salaries and disposable household incomes, travel demand has skyrocketed. Economics 101 — more demand, and limited supply, lead to increase in price. Flight prices have consistently increased over time. Various slab-based pricing is now available, making you pay more and more to save time, and get convenience. Prime flight ticket, which offers the right to board the plane first, and have your checked-in bag out first, is a popular example to quote.

Not only travel flights, but hotel stays, and tourist places have generally become costlier, at a much faster rate. Some tourist destinations such as Bhutan have started charging as much as $100 per day tourist fees. Venice, Thailand, and Spain are planning to charge tourists additional fees from 2024 onwards (read the article here).

Inflation. Inflation everywhere, where do we land next?

There are not just two scary forms of inflation. There are many other areas where inflation is high.

In your 30s, you have seen two decades of inflation. You now know, that inflation is real, and is eating away into your hard-earned wealth. Some forms of inflation are tough to escape, such as real estate, education, and medical inflation. The working skill you learned painstakingly over two decades and now excel at, is no longer vogue. What do you do then?

As you start a family and have kids, you want to move to a better residential society which is closer to schools and hospitals. With kids, comes the education and healthcare costs, which inflate at 10–15% annually.

These scarier forms of inflation — rents, travel, education, and healthcare, can constitute anywhere from 50% to 80% of your monthly income. If this major part of your income is getting costlier at 12% annually, and you get a measly 6–7% annual pay hike, your situation is going to get way worse way fast.

Enough of the gloomy stuff. There is a solution. And many, for that matter. Lets now know some ways to handle the scarier forms of inflation like a Pro.

Way 1: Making realistic lifestyle changes

The equation of Expenses = Income — Investment, has stood relevant for ages. But what if you were to decrease your expenses without changing your income or investment? Yes, it’s possible, let’s talk about it. You may have to make some tough choices to change your lifestyle. But these would be realistic, and help you achieve your financial goals.

Moving to the outskirts of the metro city you live in.

Rents are usually 20–50% of your monthly income. Hence tackling rental inflation should be your priority number one. Outskirts are where cheaper residential societies are found. Metro stations are a distant future here. You got good schools and hospitals. However, your travel time to work will double. Doable? Then take this option. I have seen families work it out. Some do this by taking advantage of a hybrid work culture (2–3 days in a week working from home). Some even hire a full-time driver to pick up and drop them off daily to/fro from work. And this arrangement actually turns out cheaper than paying high rent living in the heart of the city.

Another way to reduce your expenses is by considering homeschooling your kids. Yet another -> cook at home, and limit eating out at restaurants. Order food only a couple of times a month. Giving up alcohol, and some expensive hobbies such as golf, etc. also helps. Replace an international trip with a domestic one. Replace a domestic trip with a weekend getaway at a nearby resort. All the little changes add up over time.

Take a goal to reduce your expenses by at least 10%, within 1 year. Once the goal is defined, you will be able to come up with more ideas than what I have listed here. Focus on reducing the scarier forms of inflation (more than 10% per year), such as real estate, education, travel, etc. Discuss with your spouse and others whom you live with (parents etc.). Collectively, decide and act as a family, to achieve your financial goal. You will get there sooner than you think!

Way 2: Invest in Inflation beating assets

If you want to beat inflation which is 10–12% annually, equity is the way to go. The Indian stock market has given 14% annual returns over the past 20 years. Equity is a great compounding machine.

Invest regularly, and be patient with your equity investments. Financial goals such as kids’ education, buying a house in 5 years, etc. are best achieved by equity investments. Once invested, do not withdraw your investment, and let the compounding do its job. Mutual funds are a safe and reliable way to go here.

Do not fall prey to get-rich-quick schemes. Any ad that promises to double your money in one year is either a scam or not regulated hence risky. Use the known, reliable way — mutual funds. If you have the required financial knowledge and time to research stocks and track the market, then do some individual stock picking as well.

Way 3: Establish multiple sources of Income

Going back to the formula of Expenses = Income — Investment, what if you can increase your income? Getting salary from a full-time job is ok, but maybe not enough.

There are multiple ways you can create new sources of income.

Do you love, and are good at creating logos? Become a freelancer logo designer. Just work 8–10 hours on weekends, and earn a minimum INR 20k per month from freelancing gigs.

Are you good at creating WordPress websites? Become a WordPress site/blog creator, and earn a minimum of INR 40k per month from related freelancing gigs.

You can go to Fiverr.com, look at the many skills being sought out, and see if any fits you.

Do you cook really well? Make a little extra and sell in your society. Healthy homemade tiffin is sought out by bachelors and flatmates. Regional food, such as Oriya food, Goan style food, is sought by folks from these regions but living in metro cities. Can you make healthy snacks with less oil and a lip-smacking taste? Go for it. Selling within society is easy. Just use the society WhatsApp group, or the society app (MyGate or Adda), and you have a running business. Further, within society, word of mouth is a strong way to market your product, with zero marketing cost!

Are you a tenured professional and can advise others on resume building, cover letter reviews, interview prep? Do part-time career counseling, and earn north of INR 20k per month.

There are a multitude of other ways to generate additional income sources. Know your passion, carve out that extra hour daily, or 8–10 hours over the weekend, and you are sorted. Time management is critical here. You might have to trade off some family time, some party time, some Netflix time, but its worth it. You do what you got to do.

Parting Thoughts

Nothing in life is permanent. Short-term pain can lead to long-term gain. A small tradeoff in the present can help you get to the future state you desire. Planning early, and correctly, is important.

I hope you now understand that inflation is not the widely quoted 5–6% number. The scarier forms of inflation, are the ones that eat into 80% of your monthly income, and cost you 10–12% more every year. The rent, travel, education, and medical care are to name a few.

Inflation hits us differently in different stages of life. As a bachelor, the inflation might not sting as much as the family phase of your life, where you have kids to take care of and some dependents in the family as well.

As if competition alone does not make your earning potential harder, the constant change in work requirements and skills in demand make you upgrade to remain job-relevant. Even if you plan to get out of the job race and start your own company, you need to plan your finances for this.

A key first step is to set a goal for yourself. It can be to decrease expenses by 10% in one year or increase income by 20% in one year. Once the goal is set, let your mind ponder over solutions. And you will find more than one. More than the ones listed in this post. The ones that are personalized to you. Go for it, and beat that Inflation!

Have you experienced a scarier form of inflation? What is it? Do share in the comments below.