5 Things to Combat Inflation

Aug 24, 2022 | Money management

The concept of having to combat inflation is not something that many have experienced under the age of 40 and it is being felt across all households even with UK employment at one of the highest rates in years.

It is frustrating when you have to pay much more for household items that were half the price a few years ago.

What is inflation?

Inflation is an increase in the prices of goods and services across the economy that results in reduced purchasing power. It means, you can buy less for £1 today than you could yesterday. In other words, inflation reduces the value of a currency over time. 

What is causing inflation?

There are may factors creating what feels like a perfect storm. The government started the ball rolling by creating far too much money into the economy during the covid lockdown.

If an insurance policy that protects your income only pays out 60% of your salary because you are sitting at home and not going on holiday, I’m not quite sure why we protected many incomes up to 100% during a lockdown.

This created a large built-up wealth that was then released on mass to fuel demand when supply chains had been cut by covid. The demand increased prices for raw materials as there were shortages which in turn raised the price of goods around the world. What didn’t help was the war in the Ukraine deteriorating supply chains further and sending gas and electricity prices soaring. 

How to deal with inflation

  1. Adjust your budget:The reality of inflation is that your day-to-day expenses will be higher and it will affect your budget. To stay within your budget, you may need to cut back on discretionary expenses like weekends away and trips to the cinema. If you save a large percentage of salary it may be time to decrease the savings level for the next year. You may have to go for the cheaper clothing options or the cheaper version of brand names in the supermarket.
  2. Focus on your goals: Remember to ignore the noise and not to make any rash financial decisions based on economic factors rather than your personal goals. Inflation will reduce in time as interest rate rises take effect and lessen the amount of money available to consumers which reduces demand.
  3. Consolidate debt at a lower interest rate: If you have lots of credit card debt it may be an idea to seek lower rate options whether it’s a personal loan or a lower rate credit card for a certain period of time. It’s always best to reduce the debt as much as possible when inflationary pressures reduce  
  4. Keep an emergency fund: It is something we advocate at Financial Healthclub is for all clients is to have 6 months of expenses covered by an easy access emergency fund. Understandably these funds will be used more during periods of high inflation which is why it’s important to build these savings pots during the good times so the bad times become much more manageable. 
  5. Invest in the market for medium to long term: If you’re sitting on money in your bank account that you don’t plan to use in the next 3+ years, it could be working harder for you in an investment account. You don’t need to invest in anything crazy—the usual mix of stocks and bonds is still a solid long-term strategy, even during a period of inflation. The market is a hedge against inflation over the long term although it may not feel like that when you see falling share prices and bonds and increasing inflation. At financialhealthclub we encourage you to stay the course and trust your plan and your goals. Remember if you don’t need the money now or for many years to come you have time on your side and this will be a small wave in a long journey. Trust the process! 

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