Why does the cost of living keep rising and what should you do about it?

Your living cost is largely dependent on two variables: your income and market prices.

As day-to-day costs increase, inflation occurs. A mismatch in the supply-demand relationship induces inflation. When growing numbers of individuals compete to purchase a small number of products, prices inflate.

Higher rates are here and they’re going to slowly creep upwards. We can watch them erode our finances and spending capacity, or we can deal with them, starting now.

The future will be worse for us if we have trouble dealing with the present. Living expenses would be higher. We may have little to look forward to by the time we retire. This is the reality of life when it comes to personal finance issues, be it in Malaysia or anywhere in the world.

What are the costs of living?

Technically, the cost of living applies to your needs. Your living expenses do not include, for instance, the cost of products or services that fulfil your wants instead of your needs.

Why does the cost of living keep rising?

Inflation is the number of price rises over a given period. Usually, inflation is a broad metric, such as the average increase in prices or the rise in a country’s cost of living. But it can also be measured more narrowly, such as food, or services, such as school tuition.

Inflation defines how much more costly the relevant collection of products and/or services has become for a certain duration, most frequently in a year, regardless of the context.

What creates inflation?

Long-lasting, high-inflation periods are often the product of weak monetary policy. If the supply of money rises so much compared to the size of an economy, the currency’s unit value decreases; in other words, its buying power falls and prices rise. This relationship between the production of money and the size of the economy is called the money theory of quantity and is one of the most ancient economic theories.

Pressures may also be inflationary on the supply or demand side of the economy. Supply disruptions that interrupt production, such as natural disasters, or an increase in the cost of production, such as high oil prices, can reduce overall supply and contribute to cost-push inflation, where price rises are caused by supply disruption.

In assessing inflation, expectations also play a crucial role. If individuals or businesses expect higher costs, these expectations are incorporated into wage contracts or contractual price changes (such as automatic rent increase). This behavior partly dictates potential inflation; expectations have become self-fulfilling until the contracts are exercised and there’s a decision on wages or price increase. Inflation can follow similar trends over time, contributing to inflation stagnation, to the degree that individuals base their expectations on the recent past.

What can we do?

The rising living costs are deaf to grievances. With real action, we will have to cope with increasing costs: steps that directly impact our finances and the ability to live well in the face of inflation. Some re-adjustment, if not a complete redesign, is required unless we have the financial cushion to withstand the higher prices. We are not talking about a one-off re-adjustment, which for most is already very painful in itself, but rather a re-adjustment of habits.

Yes, habits. Higher prices are here to stay, and it is most likely that prices will rise at a faster rate. It is another matter if they do so gradually. Battling inflation, in other words, is a never-ending effort. Habits are ingrained actions. In the long term, habits and overcoming inflation go hand-in-hand.

#1. Manage our desires

Effective human emotions are jealousy and desire. These cards are played to the hilt by brand-driven organizations. An age-old strategy that preys on these fundamental human vulnerabilities is the use of celebrities and other social influencers to tempt customers.

These vulnerabilities are enabled when we covet what others have. We are paying for it when we buy something to match what we see others want. Flaunting happiness may be real, but the harm to our finances is real as well. The influence of the former can, sadly, not last as long as the latter.

In the end, we have to balance our impulses and control our jealousy. For some of us, this could be a regular challenge, but in the world of rising prices, we will all be better off if we practice this balance.

#2. Prioritize saving over spending

Do we first invest and save what we have left? Or are we going to save first and spend what’s left? The order of importance has a deceptively unnoticeable effect on our everyday lives, but in the long run, the effects will snowball. We’d either kick ourselves sometime in the future or congratulate ourselves for the things we do now and the habits we have now.

If we want to spend first when we know there is nothing left in the kitty, we’ll be in for a rude shock. If this occurs when income is lean or non-existent, the impact is worse. If we want to invest first and manage our expenses, we would have a cushion to fall back on in times of low income or no income. As we grudgingly put away money regularly, we can doubt the intent, but like a fire extinguisher, it may save our lives when we least expect it.

Balancing our current spending with future spending is difficult, especially if our level of spending is as high, if not higher, than our level of income. We may be pulling wool over our own eyes if we depend on the excuse that we are too busy dealing with the present to worry about the future. The future could be one second from now and everything and anything can happen. A sudden fall, a sudden illness, a sudden call for support from a loved one, all of which, if we still want to keep standing, need a strong financial buffer.

#3. Emergency funds

Ask those seeking medical treatment in the accident and emergency department if they expected to be there. Most, if not all, would say no.

Some emergencies are too big to save up for. Normally, they are beyond an average person’s financial capacity to cope. In addition to medical treatment for major diseases and injuries, injury and loss of property, professional and personal liability are some primary risks that we may inadvertently take on if they are not covered for.

To retain emergency funds, use insurance intelligently. The danger of coughing up a huge amount of cash is passed to the insurance industry so that we have enough money to deal with inflation.

#4. Seeking financial advice

Unit trusts, daily savings accounts, pensions, Private Retirement Scheme – Even the best of us would be puzzled by these options at times when it comes to personal money management. However, we should not be turned away by their ambiguous titles.

The world of financial goods is also treacherous. It’s full of landmines to the uninformed. Additionally, with our stages of life and time, the terrain alters. Our best bet is to consult daily with a financial advisor to figure them out and make it a habit. A financial advisor knows where to tread and how to steer us out of the muddy waters, aside from being able to integrate inflation into our financial plans.

Retirement must, for instance, be funded. If we look forward to retirement on a shoestring or less, with the use of an acceptable mix of insurance, savings, PRS and assets, we will be better off preparing for it early with real financial planning. It’s risky to rely on the EPF, as withdrawals for the education of our children, medical care and housing loans would take their toll on the EPF balance.

Poverty during our old age is a real possibility if procrastination, coupled with inflation, unexpected medical expenses and an unexpected change in wages become factors.

 

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How else do you cope with rising living costs? Share your thoughts in the comments.