Economies around the world are finally stabilising after several years of what can only be described as a ‘constantly evolving situation’. This ‘stabilisation’ for some means an ongoing crisis resulting in high inflation levels, and economic growth with inherent concurrent inflation for others. High inflation creates and exacerbates poverty and heightens social inequity. Facing rising inflation in their economy means that consumers are forced to make adjustments to their way of life in order to maintain their living standards, as rising price levels effectively eat away at their purchasing power. Considering the Russian invasion of Ukraine, natural disasters, and the evolving power dynamic in the Eastern bloc, it seems as if the global economy will remain ‘dynamic’ for quite some while. It makes sense therefore, to explore what we can do to endure this situation without having to dip into our savings too much.
How do we negotiate rising price levels?
The manner in which consumers can negotiate inflation depends on first identifying how severe the living situation is. While inflation is making some wonder as to how they can cope with rising expenditures and continue saving for the future, others wonder how they can meet this month’s mortgage payment or even the grocery bill. Inflation requires that we aggressively cut back on our spending – it is the level of intensity that our cutting back should take that changes depending on our financial circumstances. The following are a few avenues in which we may incur hidden expenses that may be eliminated without impacting our standards of living too much, and the ways in which we can reduce and even negate the impact of inflation on our savings.
Reducing unexpected expenditure
Reducing unexpected expenditures may be easier said than done, especially in a high inflation climate. In difficult economic times, it is important to reevaluate individual as well as common purchases (in case you have a family) to ensure two economic considerations. One is to ensure that there are no unnecessary expenses slipping through the cracks. Examples can include subscription models you may have entered into for convenience’s sake: subscriptions for online content, subscriptions for online software products, subscriptions for consumer goods, and the like. Subscription culture is very pervasive these days, and not without reason. The model can be a very lucrative one for companies and conversely, very expensive for consumers, even when we’re thinking we’re getting a good deal.
Another reason why regular evaluation of our expenses can be beneficial is because our priorities in meeting expenses may change over time. A gym membership can be a necessary expense for our continued good health. However, should inflation continue to increase, it may very well take less priority over utility bills. Many things that were once thought necessary may seem extravagant in the wake of unexpected situations such as an unplanned pregnancy or a sudden illness in the family. One way to better regulate expenses can be through categorising expenses into discretionary and fixed expenses. Discretionary expenses are those that are non-essential, while still contributing to your overall quality of life such as entertainment expenses and health and wellbeing expenses. Fixed expenses on the other hand are generally non-negotiable – food expenses, utility expenses, and mortgage and other loan repayments are a few examples.
Categorising expenses in this manner will help identify the expense category you want to eliminate as soon as possible: negotiable components of fixed expenses as well as expenses incurred at your discretion that do not contribute positively to your overall standards of living. Grouping expenses by virtue of their use can also be beneficial to gain a better perspective on what is happening with your money. Possible categories can include ‘transportation’, ‘food’, ‘healthcare’, ‘entertainment and leisure’, and the like. This will, for example, help you recognise the portion of your income that is being spent on transportation. More than one fifth of your income being spent on transportation for example may be a serious cause for concern, and identifying this will help prompt you in finding better alternatives such as shared or public transport.
As glossed over before, it might also be possible to locate negotiable components in expenses we once thought fixed. Home loans may be refinanced or repriced if they are still not contractually fixed. There may be professionals that can help you negotiate for better prices and better rates on necessary expenses such as government taxes, homeowner’s insurance, hospital payments and the like. Although obtaining professional advice may seem expensive in the short term, it may still be cheaper than financing expensive payments in the long term.
There are other ‘hacks’ or shopping tips and tricks that are frequently shared on the internet that reduce everyday expenses. These include,
- Opting for house brand/supermarket brand for everyday products
- Purchasing in bulk to take advantage of discounts, especially for non-perishable goods
- Shopping at times when timely discounts are available, such as closing time in the case of butchered meats, and baked goods, seasonal and festival discounts, credit and debit card offers, etc.
- Buying second-hand whenever possible
In addition to helping reduce expenses, these ‘hacks’ are really more useful in helping us gain a better perspective on the expenses we incur. One such example is using house brand consumer goods over more expensive options. Oftentimes, the increased price does not represent any increased utility other than the perceived value we place on the brand of our choice.
Negating the impact of inflation on our savings
We save a portion of our income against the uncertainties of the future, so it’s only natural to want to dip into our rainy day fund when a future uncertainty such as inflation does arise. However, the difference between a sudden bout of the flu and inflation is twofold. For one, it’s never quite possible to be sure when, if ever, prices will recede back to their previous levels. While the rise in the price of goods may decrease, the price levels themselves may never decrease. Oftentimes, it is not possible to increase our income in the short or even the long term, especially at times of economic stress. The only option then is to insulate our savings against the effects of inflation as far as possible in order to make sure the purchasing power of our hard-earned savings are not eroded unduly.
While it is important to have a few months of cash in an easily liquidated account for emergencies, the bulk of your savings should be diverted into avenues that compound interest for your capital. Ideally, interest rates should be higher than the inflation rates in the economy. However, obtaining the best possible interest rates for your money should at least minimise the effects of inflation on your savings. There may be many options for earning on your money depending on your country – researching into them will help ensure that you make the best of your money. An important factor to consider is the investment risk associated with the options that are being considered.
Treasury bills and bonds and fixed deposits are some of the higher-yield to lowest risk options available on the market. National and local banks in your area may also offer other high-yield options that should be carefully examined before investing in. It also makes better financial sense to divide your investments between the long-to-medium term to ensure that unexpected expenses do not find you unable to meet them. Seasoned investors can also increase their stakes in commodity goods investments. These are typically more divorced from the effects from high inflation.
The costs of inflation are many and varied and most are quick to find ways and means to mitigate its economic effects. However, the mental strain of doing so is one that is often overlooked. This strain and the uncertainties of the future can lead to high anxiety levels as well as a continuously helpless state of mind. Recognising this and obtaining the necessary support to address the mental health impact of inflationary pressures is part of mitigating the hidden costs of inflation.
(Theruni Liyanage)