Inflation is a persistent economic challenge that affects countries worldwide, and Pakistan is no exception. Rising prices can erode the purchasing power of your money, making it crucial to develop strategies to beat inflation.
This article highlights the simple and practical techniques for individuals to beat inflation in Pakistan and protect their finances against the impacts of inflation.
Inflation in Pakistan
In a country where the go-to investment options are usually traditional ones like savings certificates, savings accounts, and fixed deposits, the growing menace of inflation demands a fresh financial strategy. Our savings are taking a hit due to inflation, fueled by both local and global uncertainties such as the Russian-Ukraine war, the previous COVID-19 pandemic, and internal political issues.
These global events aren’t just distant news—they are affecting our long-term investments and posing a threat to our hard-earned savings, all while making the cost of living in Pakistan climb higher.
Understanding the Time Value of Money
When it comes to managing your money in Pakistan, a crucial concept to grasp is the time value of money. Simply put, having a fixed amount now is better than having the same amount later. This becomes especially important due to the high inflation rates in Pakistan.
Let’s break it down: If given the choice between receiving Rs 100,000 today or the same amount a year from now, it’s clear that having the money now is more advantageous. However, the implications of this idea aren’t always straightforward. Many people find this confusing because dealing with exact numbers isn’t always easy. We understand that inflation means the value of money decreases over time, but by how much? And what can we do to ensure our savings don’t lose value?
Firstly, let’s look at the numbers. The Federal Bureau of Statistics tells us that since 1991, Pakistan’s average annual inflation rate has been 9.3%. This means that if your investments didn’t earn more than 9.3% each year, you essentially lost money. Bank deposits, with their lower returns, aren’t the best way to build wealth.
Consider this: If inflation is expected to be 12% this year and your term deposit yields only 8%, you’re actually losing money.
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Committee savings, where people pool money monthly, are not great either. Your return on investment is practically 0%, and when you factor in inflation, you’re losing money. Savings accounts, certificates, and bonds also fall short of beating inflation. Only three things consistently outperform inflation in the long run: stocks, oil, and gold. Stocks in Pakistan have averaged a 21% return over the last decade, while oil and gold have returned 14% and 12% per year, respectively.
In essence, there’s risk in everything. If the value of your investment in rupees stays the same, it means the real value (adjusted for inflation) has gone down. Stocks, in particular, tend to offer the best long-term returns, making them a crucial consideration for your financial strategy in Pakistan.
How to Beat Inflation in Pakistan?
The recent surge in inflation underlines the importance of safeguarding our savings against the erosive effects of rising prices. However, not all investment options are susceptible to the unpredictable twists of the market. Now that we understand what inflation is doing to our finances, the critical question is: where should we invest to shield our money from the invasive impact of inflation?
One effective strategy to beat inflation in Pakistan is to invest your money wisely. Consider exploring investment options that historically outpace inflation rates. In Pakistan, some popular investment avenues include stocks, mutual funds, and real estate. Diversifying your investments can help spread risk and potentially yield better returns.
Read more: Benefits of Commercial Real Estate Investing
Fixed Income Investments
While stocks and real estate have the potential for higher returns, fixed-income investments such as government bonds and savings certificates can offer stability and a predictable income stream. These instruments often provide returns that are higher than the inflation rate, helping to preserve the real value of your money.
Real Assets Investment
Investing in real assets, such as gold, can act as a hedge against inflation. Historically, gold prices have shown resilience during inflationary periods, making it a popular choice for investors seeking to protect their wealth.
Increase Income Streams
Another way to combat inflation is to focus on increasing your income. This can be achieved through various means, such as acquiring new skills, pursuing additional qualifications, or exploring opportunities for a side business. A diversified income portfolio can provide a cushion against inflationary pressures.
Budgeting and Saving
Practicing effective budgeting and saving habits is crucial during times of inflation. By carefully tracking your expenses and setting aside a portion of your income for savings, you create a financial buffer that can help offset the impact of rising prices on your day-to-day life.
Manage Debt Wisely
High-interest debt can compound the financial challenges posed by inflation. Prioritize paying down high-interest debts to reduce financial strain. Consider refinancing or consolidating debts to lower interest rates and make debt repayment more manageable.
Establishing and maintaining an emergency fund is essential. Having readily accessible savings can provide a financial safety net during unexpected expenses, reducing the need to dip into long-term investments or take on additional debt.
Currently, Pakistani banks are offering some of the world’s highest interest rates, reaching up to 8 to 9%. While this might not make you rich overnight, it serves as a shield against inflation. By putting your money in these accounts, you’re essentially slowing down the rate at which your wealth erodes compared to those who keep cash.
If you let your profits compound over time without withdrawing, you might still be able to afford what you can today in ten years. However, it’s important to note that having another active source of income is essential to maintain your lifestyle.
National Saving Schemes
National Saving Schemes (NSS) are like investment plans provided by the Government of Pakistan. You can get them through authorized banks or your nearby ‘National Savings Centre (NSC).’ These schemes come in different types, such as Defense Savings Certificates, Regular Income Certificates, Special Savings Accounts, and Behbood Savings Certificates. Each has its own interest rates and how long they last.
It’s important to note that NSS might not follow Shariah guidelines, unlike some Mutual Funds or Stocks. So, before you decide, do your homework and make sure it fits your preferences and values.
Crucial Tips for a Successful Investment Journey
Embarking on your investment journey? Before you dive in, consider these six key tips to set yourself up for success:
- Educate Yourself: Start by learning about the various investment options and how to craft a solid financial plan. Resources like Investors Lounge can be valuable in providing insights and guidance.
- Create an Investment Plan: Clearly define your investment goals. What are you aiming to achieve? Determine how much you can comfortably invest and establish what you can afford to lose. Having a well-thought-out plan is your roadmap to success.
- Diversify Your Portfolio: Avoid putting all your money into one investment. Diversification is key to managing risk. Spread your investments across different assets or sectors to protect yourself from potential losses in any single area.
- Think Long-Term: Patience is a virtue in investing. Avoid the temptation to chase quick gains, as this can backfire swiftly. Instead, adopt a long-term mindset, allowing your investments to grow steadily over time.
- Start Small, Reinvest Regularly: Begin with a modest investment and gradually increase as you gain confidence and experience. Regularly reinvesting your returns can compound your earnings, accelerating the growth of your portfolio.
- Beware of Social Media Gurus: While YouTube and Twitter may be filled with investment advice, it’s crucial to do your own research. Ignore the hype and ensure that your decision is based on thorough research and understanding. Trust your judgment over online influencers.
Following these tips can lay a strong foundation for your investment journey, increasing your chances of making informed and successful financial decisions.
The Bottom Line
Beating inflation in Pakistan requires strategic financial planning, informed decision-making, and a proactive approach to managing your money. By investing wisely, diversifying your income streams, and staying informed about economic conditions, you can navigate the challenges of inflation and safeguard your financial well-being. Remember, adapting and evolving your financial strategies in response to changing economic landscapes is key.
How Pakistan can reduce inflation?
To reduce inflation, Pakistan can implement fiscal policies, control the money supply, and enhance productivity through structural reforms in key sectors.
What is the solution to beat inflation?
To beat inflation, diversify investments into assets that historically outperform inflation, such as stocks and real estate.
How to win over inflation?
To win over inflation, invest in assets with returns surpassing inflation rates, like stocks or real estate, and consider increasing income through diverse sources for financial resilience.
What are the 5 causes of inflation?
Inflation arises from increased demand (demand-pull), higher production costs (cost-push), expanded money supply, currency devaluation, and growing wages, often influenced by monetary and fiscal policies.
Who benefits from inflation?
Borrowers benefit from inflation as they repay loans with devalued money, while lenders benefit from increased demand for credit, leading to higher interest rates.