Personal Inflation Accounting: The Truths That Don't Remain in the Shadows

Inflation is perhaps one of the most insidious enemies of the economy. Especially when it is at high rates, it not only reduces the purchasing power of citizens, but also seriously shakes the financial statements of businesses. This is where inflation accounting comes into play and ensures that financial statements better reflect reality. 

 

While inflation accounting is generally used to accurately reflect the financial statements of businesses, individuals can also better manage the effects of inflation by applying these accounting principles to their own financial situations. Here are some ways that individuals can apply inflation accounting:

 1. Calculating the Real Value of Assets 

 

Individuals can regularly check whether their assets (such as homes, cars, jewelry, investment portfolios) have gained value due to inflation. For example, they can calculate the increase in value of a property over time, not in nominal terms, but by comparing it to inflation rates. This helps an individual understand whether their assets are maintaining their real value. 

2. Updating Income and Expenditure 

 

Inflation can erode individuals’ incomes, which requires more careful planning of expenditures. Individuals can update their incomes according to inflation rates to see if their earnings have maintained their real value compared to the past. At the same time, individuals with fixed income sources can manage their budgets more healthily by adjusting their expenditures according to inflation. 

 

3. Performance of Investments Against Inflation

Individuals should regularly evaluate the performance of their investment portfolios against inflation. Investments with low rates of return in particular may lose real value due to inflation. Individuals can protect the value of their savings by turning to investment instruments that provide protection against inflation (for example, inflation-indexed bonds or precious metals). 

 

4. Evaluating Debts According to Inflation 

It is important for individuals to review their debts during periods of inflation. Fixed-rate debts can be advantageous during periods of high inflation, because the real value of the debt decreases as inflation increases. Individuals can optimize their financial situation by adjusting their debt payment strategies according to inflation expectations. 

 

5. Retirement Planning 

 

Retirement savings are also sensitive to the effects of inflation. Individuals should calculate future living costs by taking inflation rates into account and update their savings goals accordingly so that their retirement savings do not melt away in the face of inflation. In addition, turning to investment options that are resistant to inflation should be a part of retirement planning.

6. Protecting the Value of Savings 

 

Individuals’ savings can lose value due to inflation. Therefore, it may be wise to direct cash savings into low-risk, inflation-protective investment vehicles. 

7. Budget and Spending Management 

 

During periods of inflation, it is important for individuals to review their budgets more frequently and re-plan their spending. With rising prices, cutting unnecessary spending can be critical to achieving long-term financial goals 

 

8. Rescheduling for Future Goals

Individuals should re-evaluate their long-term financial goals, taking into account inflation expectations. It is important to readjust the amount and timing of savings needed to achieve these goals. 

 

Ultimately, by applying the principles of inflation accounting to their financial lives, individuals can minimize the negative effects of inflation and manage their finances more confidently. This allows for more informed financial decisions and more robust planning for the future.