What’s Your Personal Inflation Index?

by Vinaya HS on May 20, 2011

in Finance

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To me, “inflation” is simple.

If last year, I was spending Rs 25,000 per month on an average and this year, if I am spending Rs 30,000 per month on an average, then my expenses have inflated by 20 percent — and that’s my Personal Inflation Index.

Simple.

Then, it really doesn’t matter to you one bit what the inflation indices at the national level are. You’d really really stand out if you were consuming the same basket of goods — and in the same proportion — as what goes into determining the national inflation indices. Of what relevance then is an 8% — or whatever percent quoted by [insert your favorite media house here] — national inflation index (WPI, CPI, et al.), when your personal expenses have gone up by 20% over the course of a year? Would you then be happy if your equity investments — the favored panacea for all inflation-related-worries — were earning a mere 15% per annum?

You obviously wouldn’t.

So, the next time you hear/read the word “inflation” stop listening/reading. Instead, focus all your energy on how best you can cut down your expenses so that your personal inflation index is at its minimum.

In my MBA classes, the answer to every other question was “inflation.” I doubt if anyone actually understood that term. No wonder then that this term is over-hyped!

What do you think?




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 5 comments… read them below or add one }

herge May 20, 2011 at 10:15 AM

The personal inflation index is useful only to check ones expenses. It cannot be compared to equity returns. This depends on life events like birth/death/illness.

Try calculating retirement corpus with double digit personal inflation index! Sure shot way to get depressed.

Ashutosh Tewari May 20, 2011 at 10:42 AM

I know this a lame excuse, however, I have been in such a “fire fighting” mode that never have been able to do expense tracking. Its high time now for me to start. Thanks for the post.

Vinaya HS May 20, 2011 at 11:36 AM

@Ashutosh:

How do you plan to do that? And would you be tracking your expenses in detail or at a higher-level?

Ashutosh Tewari May 20, 2011 at 11:38 AM

Planning to start with a high level tracking. Any suggestions on how to begin ?

Vinaya HS May 20, 2011 at 12:48 PM

I used to have the following categories:

1. Salaries for Domestic Help
2. Utility Bill Payments (included cell phone bills)
3. Fuel
4. Personal Expenses (clothes, eating out, entertainment, etc.)
5. Miscellaneous

Fuel has always been my weak point. I burn plenty of it each month.

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