Inflation is a key aspect that impacts every individual. It is also common to discover that the announced or public rate of inflation appears to be significantly lower than what you are experiencing. This has nothing to do with the manner in which the data is collected or released but with the fact that the consumption basket for an individual will be different from the composition of the official index.
This is why everyone should do an exercise to figure out their own rate of inflation in important areas.
Here is how that can be done:
List Out The Expenses
The presence of a budget or the recording of the expenses that are actually being made is an important initial step in the entire inflation calculation process.
There has to be a proper record of the data that is being used for the purpose of the exercise, and hence this step is vital. The expense list enables one to identify the primary areas where expenditures are made, while the actual recording of data enables a person to know the exact amount that is being spent. So if this is known, then the weight or importance given to a particular segment like education or medical expenses in the inflation basket becomes very clear. This helps make the next step of the process easier.
Identify The Main Areas
The individual's overall spending basket is going to have multiple items.
However, for the purposes of the inflation exercise, there is no need to obtain all of the details and make the calculations complicated. Here we are just trying to get a rough idea of the kind of inflation that is being faced and how one should plan for it. This is the reason why it is important that the main items in terms of high expenses are identified.
The key thing is that these would differ from family to family. Some might have a higher amount that is going towards a home loan EMI and their children's education, while others might be spending more on medicines for the elderly in the family. The young might be spending more on travel and discretionary expenses, so this would be different from many other budgets.
These are the places where the inflation will hurt the most, and hence the extent of the amount spent here needs to be considered.
Find Out Area Specific Inflation
The next step is calculating the inflation of these specific areas of high expenses. In some cases, the person may have to identify and calculate the figures themselves.
For example, education costs. The overall education inflation figure of the government might not give the correct picture to the person and hence it would be important to look at the kind of rise that you are witnessing for the specific courses that the children are studying. This can take some time and effort, but it is key to arriving at the final strategy that has to be followed.
Multiple Numbers
The end result of this process is that one could end up with different figures of inflation for the few main areas of expenses that one is spending on. This is not a negative thing, but appropriate for the various calculations.
There is no need to convert this into a single figure through a weighted average, as these multiple inflation figures can be used to plan the future expenses in each of these areas in a proper manner and then construct an investment plan. This will give the right indication in terms of the amount that needs to be kept aside for the spending in each specific area, and hence this can be incorporated into the overall plan.
There is no need for mathematical precision in the self-inflation calculation, as the idea is to get a proper picture of the situation to better plan expenses.
Arnav Pandya is Founder - Moneyeduschool
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