How to Handle the Effects of Inflation During Pre-Retirement and Post Retirement

We often hear from our parents and grandparents that they used to buy movie tickets for Rs. 5. Milk that we used to buy for Rs. 13 few years back has doubled now. Have you ever thought why such change in price happens?The answer is inflation.You can’t AVOID inflation:For the price increases to qualify as inflation, the rise in price has to be a sustained one. With time, for every rupee you own, you’d be able to buy a smaller percentage of good or service.When inflation begins to march north, there tends to be a decline in the purchasing power of money. Let us consider the inflation stands at 5% annually. Theoretically, bottle of water costing Rs.20 today, would cost Rs. 21 in a year.It is possible to control inflation and it is not possible to stop or avoid inflation.How can you handle Inflation? Inflation affects each person differently. As we progress in profitable positions in work, typically the amount we spend also begins to soar. While certain lifestyle changes with time are unavoidable, remember that every spending decision taken today can affect your finances of tomorrow. Read on to understand how we can combat the detrimental effects on inflation.

Handling Inflation During pre-retirement:Inflation can be best handled with the right investments.· Avoid excess spending and invest a percentage from your increased salary. Evaluate your budget and earmark specific areas of expense. Try to forecast your expenditure and work towards minimum deviation from your planned income to expense ratio.· Design a lifestyle that suits your requirement. Decide how much you want to spend on luxuries. As you inch closer to the retirement finish line, ensure that your luxury needs are at the minimum.· Try and work towards an annual growth in income generation. Explore new opportunities and ventures to augment your income.Pre-retirement investments and inflation:Remember that it is not enough if your investment makes sense; it also needs to make cents!· Don’t keep money stagnant in your safe. In fact, with time its value depreciates. What you can buy with Rs. 100 today will cost you Rs. 150 after a 6 or 7 years.· When you make an investment, ensure that the rate of return is higher than the inflation rate. The difference in inflation rate and investment return rate is your actual return on the sum invested.· Inflation trends have a profound effect how each portfolio needs to be structured. Allocate your assets based on your risk return expectations. Higher the risk, higher the returns. Embrace equities for long term.· Proven Diversified Equity Funds: This investment option can churn good returns if you have a good appetite for risk, as the returns range an average 12-15%, which can suffice to beat inflationary trends.Focus on what return your investment will yield post tax and invest wisely.Inflation during Post-retirement:”Inflation is the crabgrass in your savings.” -Robert Orben. Failing to anticipate the effects of inflation on retirement finances can be a costly mistake. While it is important to keep investing after retirement too, the tolerance to risk also needs to be phased down.· Plan for a fund that will sustain in your sunset years· The inflation rate needs to be factored while deciding on the corpus fund.

· You need regular income after retirement. This regular income need to increase year after year to take care of the inflation.· Creating a corpus that can provide regular income year after year.· Creating another corpus, that can help in providing additional regular income that can take care of inflation.What we need to understand is that the investment strategy after retirement is not to beat the inflation with investments; but to meet the inflation with investments.Inflation is what every economy suffers from. It creeps on us with time. If not planned, it can sting us very hard. But as economists say, inflation is nothing to dread. Healthy rate of inflation has a positive impact of increasing consumption and keeps the capital in the economy flowing.An important Mantra:Invest your money and don’t lock it up only with safe investments. The money safe in your ‘safe’ will not yield returns that can save you from inflation. For becoming a well disciplined investor and achieve your financial goals, you need to focus of creating a financial plan.

Car Finance – What You Should Know About Dealer Finance

Car finance has become big business. A huge number of new and used car buyers in the UK are making their vehicle purchase on finance of some sort. It might be in the form of a bank loan, finance from the dealership, leasing, credit card, the trusty ‘Bank of Mum & Dad’, or myriad other forms of finance, but relatively few people actually buy a car with their own cash anymore.

A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the value of £8,000. Today, that same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.

With various manufacturers and dealers claiming that anywhere between 40% and 87% of car purchases are today being made on finance of some sort, it is not surprising that there are lots of people jumping on the car finance bandwagon to profit from buyers’ desires to have the newest, flashiest car available within their monthly cashflow limits.

The appeal of financing a car is very straightforward; you can buy a car which costs a lot more than you can afford up-front, but can (hopefully) manage in small monthly chunks of cash over a period of time. The problem with car finance is that many buyers don’t realise that they usually end up paying far more than the face value of the car, and they don’t read the fine print of car finance agreements to understand the implications of what they’re signing up for.

For clarification, this author is neither pro- or anti-finance when buying a car. What you must be wary of, however, are the full implications of financing a car – not just when you buy the car, but over the full term of the finance and even afterwards. The industry is heavily regulated in the UK, but a regulator can’t make you read documents carefully or force you to make prudent car finance decisions.

Financing through the dealership

For many people, financing the car through the dealership where you are buying the car is very convenient. There are also often national offers and programs which can make financing the car through the dealer an attractive option.

This blog will focus on the two main types of car finance offered by car dealers for private car buyers: the Hire Purchase (HP) and the Personal Contract Purchase (PCP), with a brief mention of a third, the Lease Purchase (LP). Leasing contracts will be discussed in another blog coming soon.

What is a Hire Purchase?

An HP is quite like a mortgage on your house; you pay a deposit up-front and then pay the rest off over an agreed period (usually 18-60 months). Once you have made your final payment, the car is officially yours. This is the way that car finance has operated for many years, but is now starting to lose favour against the PCP option below.

There are several benefits to a Hire Purchase. It is simple to understand (deposit plus a number of fixed monthly payments), and the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owing may be more than your car is worth early on in the agreement term). Usually you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.

The main disadvantage of an HP compared to a PCP is higher monthly payments, meaning the value of the car you can usually afford is less.

An HP is usually best for buyers who; plan to keep their cars for a long time (ie – longer than the finance term), have a large deposit, or want a simple car finance plan with no sting in the tail at the end of the agreement.

What is a Personal Contract Purchase?

A PCP is often given other names by manufacturer finance companies (eg – BMW Select, Volkswagen Solutions, Toyota Access, etc.), and is very popular but more complicated than an HP. Most new car finance offers advertised these days are PCPs, and usually a dealer will try and push you towards a PCP over an HP because it is more likely to be better for them.

Like the HP above, you pay a deposit and have monthly payments over a term. However, the monthly payments are lower and/or the term is shorter (usually a max. of 48 months), because you are not paying off the whole car. At the end of the term, there is still a large chunk of the finance unpaid. This is usually called a GMFV (Guaranteed Minimum Future Value). The car finance company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. This gives you three options:

1) Give the car back. You won’t get any money back, but you won’t have to pay out the remainder. This means that you have effectively been renting the car for the whole time.

2) Pay out the remaining amount owed (the GMFV) and keep the car. Given that this amount could be many thousands of pounds, it is not usually a viable option for most people (which is why they were financing the car in the first place), which usually leads to…

3) Part-exchange the car for a new (or newer) one. The dealer will assess your car’s value and take care of the finance payout. If your car is worth more than the GMFV, you can use the difference (equity) as a deposit on your next car.

The PCP is best suited for people who want a new or near-new car and fully intend to change it at the end of the agreement (or possibly even sooner). For a private buyer, it usually works out cheaper than a lease or contract hire finance product. You are not tied into going back to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for your car and conclude the agreement on your behalf. It is also good for buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.

The disadvantage of a PCP is that it tends to lock you into a cycle of changing your car every few years to avoid a large payout at the end of the agreement (the GMFV). Borrowing money to pay out the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car, so it nearly always sways the owner into replacing it with another car. For this reason, manufacturers and dealers love PCPs because it keeps you coming back every 3 years rather than keeping your car for 5-10 years!

What is a Lease Purchase?

An LP is a bit of a hybrid between an HP and a PCP. You have a deposit and low monthly payments like a PCP, with a large final payment at the end of the agreement. However, unlike a PCP, this final payment (often called a balloon) is not guaranteed. This means that if your car is worth less than the amount owing and you want to sell/part-exchange it, you would have to pay out any difference (called negative equity) before even thinking about paying a deposit on your next car.

Read the fine print

What is absolutely essential for anyone buying a car on finance is to read the contract and consider it carefully before signing anything. Plenty of people make the mistake of buying a car on finance and then end up being unable to make their monthly payments. Given that your finance period may last for the next five years, it is critical that you carefully consider what may happen in your life over those next five years. Many heavily-financed sports cars have had to be returned, often with serious financial consequences for the owners, because of unexpected pregnancies!

As part of purchasing a car on finance, you should consider and discuss all of the various finance options available and make yourself aware of the pros and cons of different car finance products to ensure you are making informed decisions about your money.