A Definitive Guide to Inflation Proof Your Life

Alifiya Aun Ali
December 17, 2019

A few friends of mine came together to start a new venture. They set aside a certain amount to provide for their families before chasing their dream. It seemed like a good idea and they did quite well in the first two years. However, they closed down abruptly a few days ago just as they were poised to take off.

The reason: Inflation. Their families simply could not cope with the rising prices and uncertainty of income to allow them their entrepreneurial indulgence. They were comfortable, upper-middle-class households, which, one would assume, are not hurt by the rising prices of milk, eggs and fruits.

Inflation has manifested in the middle-class households in areas other than the bare necessities. The cost of education from pre-primary to college-level has soared. Not only are private colleges and schools seeking exorbitant fees, but most families also incur additional expenses on coaching, crash courses, extra study material, tests, subscriptions and books.

The cost of buying a house across major cities of Pakistan is beyond the reach of most. They either pay a very high rent or have taken loans to buy a house, mostly in the big cities like Karachi, Islamabad and Lahore a rent or a home loan instalment is the biggest draw on a family’s income.

The next big drain is in the form of transportation expenses to commute to school, work and social outings with the ever-increasing congestion of the roads and the long hours spent stuck in traffic, fuel is also a major concern. Several maintain multiple vehicles, from cars to a bike per adult family member.

The rate of inflation that applies to just these three major costs of Indian households is not the rate that the government publishes.

It is far higher, and in many cases, higher than the rate of growth in household income. The proportionate share of these expenses in the household budget is increasing with inflation, leaving less for other expenses and, importantly, for saving and investment. Worse, households end up spending tomorrow’s income today, taking loans to fund these expenses.

Since the assets they buy on loan do not contribute to their income, at least not immediately, they find themselves in a debt trap. They live in anxiety about the adequacy of income to meet increasing expense levels.

The underlying cause for the uncontrolled inflation in the key consumables of the household is the failure of the government to do its job. Providing good quality public transport, ensuring that real estate markets are not skewed in favour of developers and builders and other elites of the country.

You can think about inflation in a way that, If you knew someone was coming to rob you, what would you do? Shrug off the threat, or take precautions to protect your interests?
Unfortunately, inflation robs us all.

It’s a silent thief that whittles away the value of our money, making each dollar worth less and less over time. However, it’s also part of a healthy economy. It’s important to unravel the mystery of inflation and understand how it affects you so you can use it to your advantage and protect yourself against its potentially negative impact.

A basic question we want to know is,

What Is Inflation?

Say you went to the store in 1990 and spent Rs40 for two packs of gum. Today, Rs40 might only get you one pack. Inflation caused your money to lose some of its purchasing power, meaning your rupees have become weaker.

The big danger of inflation isn’t some arbitrary number in the economy; it’s that the money that you have to spend every month increases. What if you could lock in some of your expenses?

The Bureau of Labor Statistics (BLS) in the US defines inflation as the process of continuously rising prices or put another way, the continuous decline in the value of money. It’s caused by numerous factors including exchange rates, increases in the money supply, and national debt.

Governments measure inflation to determine how prices rise over a set period, generally on an annual basis. They also monitor the costs of select goods and services that average households purchase, such as food, energy, and rent, all while discounting temporary price spikes.

Paying more for the same stuff may not sound ideal, but inflation is interpreted as a sign of growth in a healthy economy. The flip-side is periods of low inflation or even deflation, in which prices fall.

During those times, money retains more value and consumers get more value for the rupee. However, that’s not always a cause for celebration, as low inflation and deflation typically cause wage freezes.

inflation that surged to a five-year high at 7.3% in the last fiscal year due to upward revision in electricity and gas prices and 32% depreciation of the rupee in one year.

Against the annual target of 6%, the average inflation in the fiscal year 2018-19 surged to 7.34%, reported the Pakistan Bureau of Statistics(PBS)

It was the highest average rate in the past five years. Previously in the fiscal year 2013-14, the rate of inflation was 8.6%, the point from where it had started receding. The rate of inflation was more than double the annual economic growth of 3.3% recorded in the last fiscal year. (Source: Express Tribune)

Effects of Inflation and How to Protect Yourself

Since inflation impacts the value of money, it can have tangible effects on various aspects of our lives. It’s important to factor inflation into your financial decisions to ensure you’re making smart choices both in the short- and long-term.

You may be unable to stop inflation, but that doesn’t make you powerless against its effects. Understand how it affects your purchasing power and you can start building effective strategies to protect your finances. Here are just a few ways you can prepare yourself for the barrage of higher prices brought about by inflation.

Self Protection from Inflation

Are you ready to outline your inflation protection plan?

Cost of Living

Inflation’s most obvious effect is that it raises the cost of living. The amount you spend today won’t buy an equal amount of goods and services in the future.

Eventually, you’re going to pay more for food, electricity, healthcare, electronics, and so on. Keep a check on your lifestyle what you spend today if it’s a luxury or a need, can it be done in a lesser amount, if yes save money for tomorrow when things won’t be priced as they are today.

But inflation can be tricky, as it does not impact the cost of all goods simultaneously; meaning not everyone and everything is equally affected. When inflation is on the rise, do your best to keep all sources of income, such as salaries and investments, growing as fast as (or faster than) your expenses. During deflationary periods, as prices decline, try to increase your savings instead of spending more.

Salary

Inflation often drives wages higher because companies are willing to pay more when the economy is growing and the cost of living for employees is on the rise. If possible, shoot for a raise that’s higher than the rate of inflation to ensure you outpace it.

Sometimes wages increment is not directly proportional to the inflation and not all things are directly attached to inflation. For instance, people are happy to pay for a few things even if the prices are on the rise. For instance eating out, buying grocery, school fee and expenses etc.

When pay increases lag inflation (or you don’t receive raises at all), problems arise. For example, workers earning Rs10,000 in 2015, would not be able to support their family if in 2019 they are still earning Rs.10,000 as their purchasing power would be lost due to inflation.

Working unskilled jobs and odd jobs raises your risk of being victimized by inflation. Some of these jobs pay less and are often unreliable for a longer period. They are not constant and may be available at some point and unavailable at some which create instability and panic in your life. So when you working always have the habit to save some percentage of your income each month the ideal percentage of saving from your salary is 30% that will help you in your rainy days, when you are low on your income.

Another method to save from your salary is a very simple yet effective method, take few envelops and designate each envelope for each expense and put the money as per your household expense, this simple activity would give a clear idea of your earning to spending ratio.

A good way to boost your chances of maintaining a salary that keeps up with or outpaces inflation is to pursue skilled positions and continuously increase your skillset as well, there are relevant in the current economy. And during inflationary periods, negotiate more aggressively for larger raises.

Employment

Generally, inflation is good for the labour market. When the economy is growing, people earn more and spend more, and companies are more likely to keep workers employed and hire others to meet growing demand. However, low inflation and deflationary conditions have the opposite effect without growth, companies find little or no need to create new jobs.

According to the Foundation for Economic Education, when prices deflate faster than wages, it can cause a surge in unemployment.

This happened in the US in the latter half of 2014 after oil prices plummeted. USA Today reports that tens of thousands of layoffs per month occurred in oil-producing states as oil companies struggled to cover costs with declining revenues. The best time to look for work is during inflationary periods when unemployment and, therefore, competition for jobs is lower.

Debt

Credit and loans are usually cheapest during low inflation or deflationary conditions because creditors are pressed to spur consumer demand. Some creditors even offer interest-free periods, which provide the opportunity to borrow money for free. Then, as inflation rises, interest rates tend to follow the suit and increase with time.

It’s best to borrow during low inflation or deflationary periods, assuming interest rates given by the bank and creditors are favourable. Repaying debt becomes easier if your earnings outpace inflation because your current debt burden will consume less of your income over time.

If your work cycle or remuneration cycle is not constant then don’t take too much loan which you are unable to pay back on time.

Government Benefits

Retirees and disabled people are especially vulnerable to inflation. Many rely on a fixed income, such as pensions and the savings kept in their accounts that serve as their regular source of income although limited. If prices rise too quickly, they may have difficulty covering living expenses, leaving them with little or no disposable income.

If you’re 25 or 35 years old and your salary isn’t cutting it, chances are, you can get another job. It isn’t as easy to find new sources of income when you’re elderly or disabled.

Government benefits such as pensions don’t change as in response to inflation but the interest rates might change sometimes better or worse for the customers. For example, State bank determines the rate of interest that should be which shall benefit the customers.

To prepare for potentially decreased buying power in your later years, establish savings and contribute to a retirement fund during your working years. Those funds can complement your government benefits (pensions) as they lose value due to inflation.

Savings

In a growing economy, saving is a loser’s game unless you get a rate of return on your money that’s equal to the rate of inflation. And even then, you’re only keeping up with inflation. To beat the battle of the eroding value of the rupee, you need your money to grow faster than inflation, and that growth is especially important for your retirement savings.

When interest rates are attractive, you can beat inflation by stacking your money in a savings account or money market account, or by investing it in certificates. For example, if your bank pays you 5%, but the inflation rate is only 2%, you’re getting a decent return with limited risk. If there is no healthy balance between the two, then it seems you are on a pace which isn’t going to beat inflation.

Learn the Art of Investing

Investments are among the best ways to insulate your life savings from the effects of inflation. By taking the plunge and putting your money in a diverse portfolio of stocks and bonds, you can grow your worth more quickly than if your money was idling in your bank account. Start paying more attention to financial news and trends to uncover where smart investments lie.

Stock-Market

Historically, one of the best places to beat inflation and get attractive returns has been the stock market. Granted, investing in stocks means taking on numerous risks and investing with a correct understanding of things, with all your cards properly placed that ensures that you shall/will not face any loss.

Prize Bonds

Another way to save money is to buy prize bonds, these bonds are of multiple price range starting from Rs.100 going up to Rs.40, 0000 each, each varying in its prize money that varies from the price of the bond. For example, 40,000 Rupees prize bond if you win the first prize you can win seven hundred million.

Buy Gold

Gold has already significantly run-up in price since 2010 with the expectation of inflation along with a low-risk, bunker mentality among some conservative investors. But if inflation takes hold, this dollar-backed commodity could soar even higher. If this turns out to be the case, don’t be tempted by mining companies. Your best bet is to buy gold through a reputable source that you can trust.

Keep Your Options Open

As the motto of the Boy Scouts goes, be prepared. Always have a Plan B (or several) in the wings when things take a turn for the worse. Budget your income wisely and build an emergency fund. Look into inflation-proof assets like real estate, commodities, and income sources with steady cash flow. Maintain a clean lifestyle and find a good health insurance plan to counter the rising costs of medical care.

Real Estate

Real estate can be a great inflation hedge. Over time depending on the part of the country that you live, as Properties in Karachi and the other metropolitans are very expensive ass compared to in, plus you may have noticed that home prices have increased dramatically since the ’70s, the ’80s, ’90s, and 2000s and so on.

Desirably, if you own rental real estate you may get rising rents in an inflationary environment. That ability to increase your future cash flow gives you an inflation hedge if your cost of living commensurately increases.

Look for fixed rates

When it comes to inflation, time tends to be your biggest enemy. As prices grow across the board, so too do the regular dues and fees that come with most transactions.

A fixed interest rate prevents your regular payments from ballooning along with inflation by keeping your interest proportional to your actual savings. Whether it’s on a personal loan, a savings account, or a future investment, you must find a deal that guarantees fixed rates for its duration.

Buy a home

And by “home” we mean an actual house built on a plot of land in your name. Owning a property means that you will have a concrete asset you can pass down to your descendants or use for a different purpose later down the line. If you can’t afford to buy a property with cash, you can shop around for a home loan at terms that agree with your current budget.

Insurance

Insurance can be your protector in good and bad times, your saviour during the period of inflation and deflation, as the insurance plan swings the risks from you to the insurance company and saves your money in a time of need or emergency. Ensure your assets e.g.: your car, home etc. for any known-unknown risk and circumstances.

Live thriftily

As inflation often has an immediate effect on prices, one no-brainer solution you can try is minimizing your spending. Keep frivolous spending to a minimum. Save on gas by carpooling, taking public transport, or even working from home. Be more strategic about how you use your credit card, keeping an eye out for exclusive discounts, and use rewards programs.

Things to Avoid

One of your biggest expenses in retirement may be real estate, your mortgage on your home, or other fixed loans such as a car payment. Fixing the rate of interest on your liabilities is a way to hedge against inflation because you are no longer are subject to rising expenses.

If your mortgage is fixed or your car loan is fixed you know, with certainty, what your expenses are going forward regardless of the inflationary environment at least on that part of your spending.

Spending too much on Luxury items

Always be prepared for the rainy season and avoid spending too much on luxury items, remember always be penny wise, “A penny saved is a penny earned”. Keep that in mind and avoid any such situations.

Avoid Debt

If you believe or are concerned about heading into an inflationary environment or if you don’t have some certainty around your spending levels for your retirement, avoid the debt, don’t take any kind of lending from the bank as it will lead to stress and strain on your monthly financial budget.

Final Word

While some of these tips are simple enough for you to incorporate into your regular spending habits, others may require greater involvement in the long term.

The good news is that financial literacy is the gift that keeps on giving, and can better prepare consumers for any future upheavals in the financial market. Get a head start on your finances today, and save yourself from a world of trouble tomorrow.

Take a lesson from businesses, which use these forecasts to guide their short-term and long-term decisions. If you’re negotiating a salary and inflation is projected to rise, make sure you factor in the likelihood of higher costs of living so that if can uncertain situation arises, you are financially protected and able to cope with the situation.

If you need to make major purchases, such as a car, consider whether prices and interest rates are likely to rise or fall to determine the best time to buy. As with anything related to personal finance, always do your research and plan.

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