Farm to Fork: Consumers curb discretionary spends to combat inflation

Households are repaying debt and replacing costlier loans with cheaper options; rising costs are taking a toll on ability to save enough

Chanda Damodaran (name changed on request), a 40-year-old employee with a Bengaluru-based fintech company, has seen her grocery bill skyrocket by 100 per cent over the last two-and-a-half years.

“No one is immune to the current round of inflation since items of daily consumption such as rice, flour, pulses, cooking oil, etc have all become more expensive,” she says.

For many households, rising costs are taking a toll on their ability to save as incomes haven’t gone up in similar proportions. The cost of travelling, cooking fuels, electricity, and so on, have also risen during the last 1-2 years. Says Damodaran, “I often have to resort to the money lying in my fallback account at the end of the month, something I haven’t done in 18 years of employment.”

Damodaran is not the only one who is finding it tough to cope with soaring inflation. R Ranade (name changed on request), 74, a Mumbai-based retired research engineer, and his spouse are senior citizens who live on interest from bank/company deposits and dividends. Rising costs have forced them to cut down on expenses as their income is largely fixed.

Says Ranade, “We have replaced cable with OTT (over-the-top platforms) and removed our landline (telephone). And I have begun to use shared transport instead of travelling solo.”

The Ranades have also switched to cheaper brands of groceries, and since they can’t cut back on their medicines, have started buying generics in bulk instead of branded medicines, wherever possible.

Augmenting income, reining in debt

To augment income, many are taking up part-time work or helping their non-working spouse rejoin the workforce. Ranade says that throughout the lockdown he had refused all consulting work that he was offered, but now plans to take it up again.

To cut down on outgo, many households are taking a relook at their loans. Sushmita Sinha, a Noida-based entrepreneur, who was on a base rate linked loan (8.5 per cent), went in for a home loan balance transfer to a repo rate linked loan (7.55 per cent), which helped reduce her EMI by Rs 2,636.

Others are also doing what they can to reduce their loan repayments. A 50-year old, who works in the Mumbai suburbs, said that he recently prepaid Rs 3 lakh of his outstanding home loan of Rs 32 lakh from his savings and annual reimbursements received from his employer. Instead of lowering the EMI, he opted for reducing the loan tenure. This will help provide some cushion as the interest rate on his home loan is scheduled to be reset to 7.75 per cent from August 1, from 6.90 per cent currently, which is the second increase from 6.85 per cent on May 1 this year.

Lowering debt, avoiding loans and choosing an optimal route is vital to reduce financial stress, advise financial planners.

Says Adhil Shetty, chief executive officer, Bankbazaar, “Revolving credit on credit cards is the most expensive form of debt. Avoid it. Unless your card offers a low-interest EMI repayment plan, spend only as much as you can repay each month.”

Importantly, don’t access credit indiscriminately just because it is available. While Buy Now Pay Later (BNPL) may be free when you opt for it, missing out on repayment can lead to interest charges and penalties. Moreover, it also affects your credit score.

If you have a home loan linked to the repo rate, the interest rate on it would have already climbed on account of the Reserve Bank of India’s (RBI) rate hikes. “Prepay your home loan periodically and whenever you receive a windfall to prevent either the tenure or the EMI from rising,” Shetty advises.

As rates rise, opt for a higher EMI rather than an increase in tenure, unless the higher EMI will make your budget go haywire, say experts.

Some have also gone for a premature withdrawal from fixed deposits (FDs) since the rate of return on it is usually lower than the interest rate paid on a home loan. Experts, however, caution that breaking an FD should be avoided if it holds your emergency fund.

Track and curb expenses

Financial planners advise that in order to combat inflation, people should first understand its impact on their household budget. M Barve, founder, MB Wealth Financial Solutions, says, “Track where the money is going—the areas you are spending more on.” Thereafter, separate your non-discretionary and discretionary spends, and focus on curbing the latter.

“Reduce visits to malls, multiplexes, and fine-dining restaurants,” adds Deepesh Raghaw, founder, PersonalFinancePlan.

Opting for smaller packs of consumption-related items to reduce wastage, ordering in rather than dining out and leveraging apps can also be looked at. To reduce grocery bills, combine with friends and family to make bulk purchases at discounted rates, says Vishal Dhawan, board member, Association of Registered Investment Advisers.

Benefit from rising yields

Banks have started revising their deposit rates upward, and more hikes are expected. So lock into shorter-duration FDs and mutual funds now and go for longer-duration products once inflation and interest rates stabilise.

The repo rate-linked deposits launched recently by some banks is also an option. “At 6 per cent (4.9 +1.1 per cent) for a one-year FD, the rate of return is good. This product also doesn’t require borrowers to guess whether to lock into an FD now or later,” says Raghaw.

Even treasury bills are offering better returns than FDs, but may not be tax efficient. Lastly, don’t reduce your allocation to equities, which has the best potential to beat volatility over the long term. “Continue with your equity systematic investment plans and rebalance periodically,” says Dhawan.

Tough times

• Solo transport replaced by shared transport
• Family and friends getting together to purchase grocery in bulk, discounted rates
• Reducing discretionary expenses like visits to malls, multiplexes, and fine-dining restaurants
• Using credit cards judiciously; paying outstanding amounts at the end of the month
• Part-prepayment of home loans to prevent EMIs from rising