Let’s look at some evergreen tactics you can employ to stay ahead of inflation this year.
Amid the suspense caused by new Covid-19 variants, worsening fears of inflation have come flooding in with the prices of goods and services on the rise in countries like Malaysia. Asian markets are hit in general as inflation rates return to the spotlight. Anxiety caused by emerging Covid variants appear to fuel the trend, as consumers throughout the world continue to feel the effects.
The annual rate of increase of a price index, usually the consumer price index, over time is known as the inflation rate. To illustrate it simply, if the identical item purchased today for RM1 is purchased again one year later for RM1.03, the inflation rate is 3%.
Every country strives for a low inflation rate, and Malaysia is expected to see an approximate 2% inflation rate in 2022 according to some predictions. Previously, the rate of inflation of Malaysia’s economy increased slightly from close to 2% in 2010 to a little over 3% in 2021.
Aside from death and taxes, inflation is another occurrence that can be predicted with near accuracy across time. In general, inflationary pressures accompany economic growth. Inflation can occur when there is too much money in the system, causing the price of products to rise. Of course, the negative effects of inflation are negated if a household’s two key sources of wealth creation—asset and income appreciation—increase at a rate equal to or greater than inflation. However, as we’ve seen time and time again, this isn’t always the case.
While the minimum wage has risen, the overall cost of products has risen faster than average wages in recent years. Understanding inflation could help with one’s personal money management.
Here are a few tips on how to fight against inflation.
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1. Find Lower Prices for Basic Expenses
What are the recurrent charges you and your household have every month? List them down and take a closer look at them. Examples include streaming services, insurance premiums, cable bills, cell phone plans, annual credit card fees, and gym memberships. What if you could maintain these services but at a cheaper price?
You can get a better bargain on practically anything to offset increased prices. Begin by establishing a rapport, then inquire about any programs or discounts that you may be eligible for. There is no harm in asking. Consumers who contact and ask for a cheaper rate almost always get it, according to surveys, and this can be a wonderful way to save monthly costs.
You should also do your own homework. For example, find out about alternative service providers and their charges. Find out if certain services have partnership programs with certain credit cards where you can get a reduction if you pay with that particular card. Set yourself a reminder to do this once or twice a year.
2. Focus on Managing Debt
In times of financial crisis, a recurring trend is that money borrowing in the form of new credit lines emerges. This is a big problem for various reasons, and the temptation to open low-interest (or even no-interest) credit cards might be a big one.
Rather than take that route, it’s best that you work to consolidate your credit during inflation. People tend to pile up the credit card lines and this makes it all the more challenging to maintain your credit score in the long run.
By consolidating, you can have a much clearer picture of how much debt you actually have. And it may be easier to negotiate payment terms with the bank too if you are serious about tackling your debt.
Do choose the credit card with the lowest interest rates in relationship to the size of your debt.
However, it should be noted that this strategy works if your debt is of a manageable amount. If your debt has reached a difficult size, the wisest option may be to engage a licensed financial planner to craft a debt management plan with you rather than struggling with less effective methods on your own.
3. Let Go of Secondary Vehicles
During inflation, it’s common to see production lines and supply chains (i.e. jobs!) begin to slow down due to shortages in various sectors. Due to this, the demand for second-hand vehicles might start to skyrocket. This indicates that the time is ripe to sell off any secondary car, truck or bike that you may no longer need. Selling an extra vehicle and contributing to the second-hand market can fetch you a nice premium, especially during inflation.
At the same time, you would also save on maintenance cost of an unnecessary secondary vehicle if you let it go now.
Speaking of maintenance cost, it may also be beneficial to assess your primary vehicle and think whether you should let go of it this year too. Whether to completely rely on public transport, or choosing to change to a lower-maintenance vehicle, the idea is worth some serious consideration if the market is able to fetch you a good price.
4. Diversify your Portfolio
Most experts will tell you about the wonders of portfolio diversification as an added measure of security for your wealth building endeavours. Consider compiling a collection of different investments to reduce the overall risk profile. This can be in the form of owning stocks in industries or countries outside of your usual preference, or getting into commodities, real estate, and alternative options.
A new option for investors is cryptocurrency like Bitcoin which is sometimes referred to as “digital gold,” and its restricted quantity should theoretically safeguard it from inflation. However, whether it will be a good inflation hedge, in the long run, is still up in the air. Some experts see Bitcoin’s recent volatility as a cautionary note to investors. If anything, they believe it underlines the difficulty of incorporating Bitcoin into a balanced portfolio.
5. Short-Term Bonds
Maintaining cash in a CD or savings account is akin to keeping money in short-term bonds. Your funds are secure and easily accessible. In addition, if rising inflation leads to increased interest rates, short-term bonds will fare better than long-term bonds.
As a result, it’s recommended to stick to short- to intermediate-term bonds and stay away from anything long-term. Make sure your bonds or bond funds are short-term, as they will be less affected if interest rates rise rapidly. Short-term bonds can also be reinvested at greater interest rates as they mature.
6. Invest In Stocks
Despite the general lack of faith in stocks, holding some can be a very effective method to battle inflation. Consider your home as a business. If a corporation is unable to appropriately invest its funds in projects that generate a profit above its costs, it will succumb to inflation. The primary concept of business success is that businesses would sell their products at higher prices, resulting in higher revenues, earnings, and, inevitably, stock prices.
Companies that can boost their prices naturally during inflationary periods are some of the greatest stocks to hold during inflationary periods. One example is commodity resource corporations. During instances of inflation, commodities such as oil, wheat, and metals have pricing power. In contrast to the price of a computer, which is subject to manufacturer and distributor pricing modifications, these things’ prices tend to rise.
Price rises alone will not be adequate to preserve equity appreciation if a company’s expenses rise. As a result, grocery stores, which may benefit from higher food prices, may also have higher costs of goods sold. Look for businesses with the highest profit margins and, in general, the lowest cost of production, such as commodity corporations or healthcare enterprises. Finally, never underestimate the importance of dividends during inflationary years. Dividends boost a portfolio’s overall performance.
7. Invest in Real Estate
Historically, real estate has done well during periods of increased inflation because the value of a property can rise. This means your landlord can raise your rent, increasing their income and keeping it in line with growing inflation. Real estate investments can be undertaken through REITs (also known as Real Estate Investment Trusts) or mutual funds that invest in REITs, in addition to homeownership.
However, the post-pandemic era may alter how real estate reacts to greater inflation. Because of Covid’s long-term effects, the fundamentals are a little shaky. As more organizations adopt remote work or hybrid models, demand for commercial real estates, such as office and retail spaces, is still shaky.
In any case, property ownership is usually always a good thing, even in inflation. There are a few reasons, but the key factor here is that the value of the home will rise along with inflation rates. Sellers can be looking at significant gains if supply is low and demand is high. In fact, owners can expect to get offers for or even above the asking price. Of course, it’s a much harder proposition to buy properties during inflation, so make sure you’re prepared with real estate before that.
If you’re invested in a property as a leveraged asset, then you might be able to enjoy a steady rise in value while paying the same fixed rates. This can boost your ROI as long as financing rates are not rising alongside the inflation rate.
8. Invest In Yourself
The finest investment you can make in yourself to prepare for an uncertain financial future is by far the best investment you can make. One that will help you earn more money in the future.
This investment starts with good education and continues with skill maintenance and learning new skills that will be needed in the not-too-distant future. Staying on top of a company’s evolving needs can help you not only inflation-proof your income but also recession-proof your career.
Conclusion
Overall, inflation doesn’t have to affect you as badly as you think. Personal financial management is key to many of the problems that come with such a crisis. Take a step back and evaluate your entire financial condition – making amendments to whatever vulnerabilities you find.
What other tips do you have to inflation-proof your finances?
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