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Inflation has been raging for a while now and it has affected people world-wide. We all know why it happened and how long it’s gonna be (spoiler: it’s gonna be for a while more at least). Therefore, I feel that it is just the time to talk about it.
When inflation started, it felt slow initially, until suddenly a number of things started to increase in price one after another. The funny thing is that it didn’t affect me initially as I don’t own my own house nor car so utility bills or petrol price hike didn’t affect me, until food prices and groceries started to increase too.
I was really surprised when a plate of chicken rice went up to $8 at one point when there was news about a possible shortage of chicken when chicken rice is one of the foods that I like to eat. That’s when I thought to myself that this is real. Another story was when I wanted to add an egg to my meal and I was charged more than 50 cents (which was the usual price).
Without the personal experiences, I believe you would be wary enough as the people around would definitely have started to complain about how prices have been increased here and there. Therefore, you would probably worry about your own cash or money during this inflationary period. At least I was, until I experienced myself and realising how this really can affect your monthly expenses as well as your budgets for the future. If you are not worried yet and still happy go lucky, I think that’s good mentally speaking, but I would still suggest you better be more aware still.
What is Inflation?
I have briefly talked about inflation, cash, risk and return in this article before, but let us recap again. It is basically like a silent killer in which it silently kills the value of your money, slowly but surely, without you knowing until the damage is done.
Inflation causes everything to go up, from your groceries to your gas, hence the purchasing power of money decreases. You might think 1–2 dollars of increase (which is how it happens most of the time) is fine, but if you buy the food everyday, it can add up to a lot. Not only that, your grocery budget too, will start to hurt you. How so?
Let’s say you have $1000 in a savings account that pays a 1% interest rate. After a year, you will have $1010 in your account. Having the rate of inflation running at 2%, you would need $1020 in the first place.
This kinda shows the loss of buying power. So, if you do a simple check and compare side by side your spending back then and now for the same things, you will start to see how it all adds up and the difference in cost can get kinda big. Any time your savings don’t grow at the same rate as inflation, you will effectively lose money.
Your Financial Health
Having known what situation you are in, time to consolidate and check your finances. It is always good to do a regular check up on your financial health after all. Also, it helps to ensure your financial health is long-lasting, just like your physical health.
You can start with your savings. Then your monthly expenses. Basics. Then you can start to look at your other stuff (if you have) like your portfolio or investments.
For your savings, just make sure you have enough emergency funds (which I also talked about in What To Do Before Investing and Habits To Set Your Path To Financial Independence). Then, check that your expenses are always within your limit. If possible, have it as minimum as possible so that you would have excess money to grow your wealth further. This is where your portfolio or other kinds of investments come in. If you still have excess, then maybe your wants can be factored in. However, remember that in this inflationary period, your expenses and your ability to ensure your basic necessities are covered come first.
Once all are checked, green light means good. Yellow light means you probably need to start paying attention to how you can reduce your expenses amid this inflationary period and start to save more. Stop going YOLO and think more about your future, like the long term. If it’s a red light, you need to start acting now. It can start from looking for help from financial advisors or if you are savvy, start doing all the basics like sorting out your expenses, planning your savings, doing budgeting, etc.
Saving Money is Important
Even though you might have heard how saving your money is useless because your bank gives a really low interest rate like 0.5% while the inflation rate is like 4–5%, it is still a really important basic habit. So, that doesn’t mean you shouldn’t save! You simply need to find other ways of putting your money, like putting it in a high interest savings account.
Saving money is important, it is the foundation. I can never stress this enough. Without savings, you can’t even spend, let alone grow your wealth. Saving money is an act that is crucial to your financial planning basically.
On top of that, saving money is good for your health too, especially your mental health. Studies throughout the world suggest that people who save for their future feel more positive, sleep better and experience better mental well-being than those with no savings. I think this is true. Try to imagine yourself being broke. Yes, this world needs money to run and I believe you will be so stressed out that it will affect you.
So, saving money is good, just that, there are better ways of saving money by placing your money in a high interest savings account, if you only trust banks. Otherwise, you can make your excess money work for you, it can be from buying bonds to investing in stocks (although it might be very volatile during this period because of investors’ sentiment). This way, you will still earn money, despite there being inflation and that really helps. Although, please do your own research and don’t forget about risks and volatility.
To be clearer, set your savings goals so that you would know whether to save in your account or make them work for you. This can be started by setting your short, mid, and long term goals.
Generally, for the short term, the use of the money is simply for emergency events or unexpected costs like when you are not earning at the moment or when you need liquidity from going to hospital. However, the next immediate short term goal for saving money is when you need to purchase something big like a house because of your marriage (another big event) within maybe the next 2–3 years time. For this, it is generally advised not to invest the money in the stock market. During such an inflationary period, the stock market can go down really quickly and you might lose the money that you need in the next 2–3 years and that might cost you more time (or worse, your partner might just break up with you).
There was actually a story in which a father invested the money meant for his child to use for college in the future but he lost it recently due to the crash and worse, it was in the crypto market. In this story alone, there are 2 big mistakes we can learn in which: he used the money that is very important and invested whole in the market that can be highly volatile (as crypto market is still quite uncertain as of the day of this article is written). This definitely cost him his time and effort as he would need to work harder to earn back all that money.
Anyway, generally for the goals further than 5 years you can start investing your money. So, making goals as to why you wanna earn money is important. Not only can it help you to be more disciplined with your financial health, you can have a better peace of mind knowing you can tide through this period. And this will have another effect in which you can have better planning for your future, without having to scramble around that can cost bad decisions, which might cost your future even more.
Check Your Expenses
Here comes the next part, checking your expenses and subsequently tracking them. Why? Without knowing how much you spend, how can one check their financial health. It’s basically just like how people keep check of what to eat so as to not exacerbate one’s cholesterol level.
So, if you already have the habit of tracking by keeping receipts or typing them down into an excel sheet, you are off to a good start as the habit is more or less there. Perhaps you just need more discipline which then can make it more consistent if it’s not consistent now. Otherwise, you better start now as tracking your spending is actually really important and by the end of the month, as you look back, you will be surprised by what you have spent.
Why do we track our spending? Besides for financial health, it is actually to ensure you are aware of where your money goes. If you are aware, you would be more mindful in spending the next time.
However, if you haven’t even started tracking at all, how do you start? Well, these days, there are a lot of apps out there you can download and start tracking. Personally, I don’t really like keeping receipts because sometimes you don’t receive receipts and you might miss computing them. With that said, if you are more of the hardcore type, you can create your own excel sheet template and customise it as much as you want, which in my opinion, apps cannot really do (customising to the details to your likings).
Of course, discipline is needed here. If you only do it half-way, that may cause inaccuracies that might then skew your expenses analysis later on.
Now, there are some things that you have to consider before you even start tracking. Well, you can just start key-ing in whatever spending right away, but that still won’t help you in managing your expenses efficiently. Budgeting is another key here.
Having a budget can help to control your limit in spending unless you decide to rebel against your own rule. Think of it as a strict law that you have to follow. Perhaps you can stretch a little bit but not too much.
By having a budget, this also can help to limit you from overspending. No luxurious stuff when you have other bills to prioritise. It also helps you in limiting your use of credit cards (credit card debt is no fun, the rate is very high and can eat you alive).
This brings me to the next one, which is to consolidate your debts. Start looking at your debts more seriously and consider paying off your debts with the highest rate first. With inflation going up, your debt is just gonna be more and more and you wouldn’t want that, trust me.
Just remember, you live not to impress others but to feed yourself (and your family) first.
Once you consolidate your expenses and debts, start checking what can be crossed or reduced. Perhaps you can start cycling instead of taking Uber or Grab. Maybe you can start cooking for yourself instead of ordering delivery. Or, maybe you can order a take out rather than a delivery, because delivery includes other fees in which during such an inflationary period, the company can just decide to increase the fees, then reduce to considering cooking yourself once in a while.
A change doesn’t have to be drastic, it can be over the time, as habit is the more important one.
You can also do a price comparison before buying your groceries or other stuff on which places sell cheaper ingredients. However, it is also important to live comfortably and happily. So don’t make yourself too miserable too, as it won’t last long when your mental health starts to get affected. A balance of health here is important. There is a difference between being frugal and cheapskate.
A few points to take note here: don’t spend more than your capability, prioritise saving, and don’t be too cheapskate (quality is important too).
Remember: as much as you can cut, there will be a point where you just can’t cut further. Therefore, if you think you have cut until there is nothing to cut anymore and you start to feel the pain or uncomfortable like you started to eat only a meal a day, etc., then maybe it’s time to look for how to increase your income instead.
Side Hustles or Part Times
Even though it is an inflationary period, it doesn’t always mean that companies just stop hiring. There will be companies that are still hiring. That means that you can actually still perhaps look for job that can provide you with a higher salary than what you are earning now.
That can certainly help to increase the amount that you can save. However, if you don’t feel like changing your job, and job hopping too often doesn’t really give a good impression, you can perhaps do side hustles or do more part time jobs. I believe you have heard how people often say something like converting your hobby into your side hustles (yes, it happened a lot ever since the pandemic).
The main point here is to increase your income so that you can save more. Save more means you can plan further and less stress. You can always start with maybe selling the stuff that you don’t need or have been collecting dust in a corner of your room, or renting our stuff, like maybe an unused room. Then, maybe you can also work a part time job on weekends which can help to improve your income too, or maybe freelancing.
Work Your Money Smartly
This last one is basically to tell you about working your idle money. If you start searching, very often people will tell you that investing will be the best way to hedge against inflation. It is because the returns on stock investments generally tend to beat inflation.
“Make your money work for you”, “Work your money”, etc. Yes, these are often said, especially if you start watching Youtube about investing your money.
Part of the reason is if you place it in the bank sitting around, it will lose to inflation. But you can actually invest your money to make more money for you and that can help to grow your wealth too. Also, there is compound interest magic for the long run. The main thing for this case is that returns generally can beat inflation.
There are many asset classes which you can invest into and I have written an article on Asset Classes and Investment Vehicles before, and one of them that people suggest at this point is probably investing in bonds for example.
P.S. Again, I am a newbie and by no means suggesting anything to buy. I am just learning and sharing what I have learned. Do your own due diligence.
Knowing this, there is this question. If savings is important but saving too much is bad too as you will lose the value of your money, so how?
Read back the paragraphs on savings and make sense of the paragraphs on investing your money. Basically, save those for the short terms, and invest the rest to grow your wealth. Of course, which asset to invest in is a different topic, but that’s the gist.
There is this concept of opportunity cost in which your money has the potential to grow your wealth further if you put it to work, else it becomes useless.
Anyway, consider investing for your long-term savings and of course, do it smartly. Look for financial advisors if you are not savvy and unsure yet you want to be safer next time. Professionals can definitely give better advice, unless you are savvy (but still do your research carefully).
Wrap-Up
Savings are important. Cash is important. There are times when you also should be on the sideline when investing too. However, growing your wealth is also important. Before thinking of investing your money, you should consolidate your debts and manage your expenses first.
With proper saving habits, you can have proper planning which can have a proper snowball effect to the rest of the actions. Some reasons on why saving money is important:
- Long-term security
- Freedom of options
- Reduced stress
- Ease of financial tension in your marriage
- Minimize risks as you can make calculated risks
I would say number 3 and 5 are the two options that you will experience during such an inflationary period when you have good financial health, which also means number 1.
So, it’s a good idea to keep short-term cash always, like an emergency fund, accessible in your savings account. When your expenses and debts are under control and you have savings that you don’t expect to need for a year or more, then you can consider investing those.
However, if your idle cash is a lot, then definitely just go for investing. At least, you will have the chance to grow your wealth when you invest in good businesses.
Additionally, don’t make dramatic changes to your investment plan if you can ride it out and investing for the long term. Don’t panic, stay calm. Adjust when it is absolutely necessary. Market conditions do have their cycles too after all. Or, you can perhaps find ways to offset inflation when you can.
Saving money takes discipline and a certain amount of sacrifice.
If you find this a good read and there is some advice that you can learn and can benefit other people, feel free to share. If you have your own great advice, do share in the comment section below! We all can always learn from each other to better ourselves.
Thank you for reading.
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