Inflation affects everyone’s wallet, bank balance, and savings. Rather than just a topic you may see from scrolling through social media, news sites and on TV, it’s a reality that influences your daily spending and long-term financial plans. Whether you keep up with the news or not, inflation will still be there making life that little bit more expensive. In October 2023, UK consumer prices were reportedly 4.6% higher than the year before, with UK inflation at 4% as per latest figures for December 2023.
Understanding inflation is helpful, especially when it comes to making informed decisions about spending, saving, and investing. It can be the difference between staying ahead or falling behind in your financial goals.
To help, below we’ll simplify the concept of inflation and provide practical tips to manage its impact on your personal finances. Whether you’re thinking about borrowing short-term loans to help in an emergency, taking out a personal loan to cover the cost of a bigger life purchase, or investing money into savings and investments, understanding how inflation affects these types of finance products can help you make a better choice for you.
While there are no foolproof ways to completely avoid the effects of inflation, there are steps you can take to better protect your money. With the right approach and knowledge, you can navigate through inflationary times more confidently. So, let’s look at what inflation is and how you can adjust your financial strategy to stay on top of it.
What Is Inflation?
Inflation is often mentioned in news reports and online, but what exactly does it mean for you and your wallet?
Simply put, inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, how purchasing power is falling. In everyday terms, it means that your money buys less than it did before.
This phenomenon can occur due to various factors:
- Increase in production costs for businesses
- Higher demand for products
- Changes in Government policies
For instance, if the cost of making bread goes up, the price at the store does too. That means you’ll either spend more to buy the same loaf of bread, or you’ll buy less with the same amount of money.
But why does inflation matter to me?
When prices rise, and your income doesn’t keep pace, your standard of living can be affected. It impacts everything from grocery bills to housing costs, squeezing your budget. For those saving for the future or on fixed incomes, inflation can be particularly challenging.
It’s important to remember that a certain level of inflation is normal and even necessary for a growing economy. However, when it’s too high or unpredictable, it can cause problems, making financial planning more difficult.
Understanding inflation is the first step in managing its impact on your personal finances. With this knowledge, you can make more informed decisions, whether it’s about daily spending, saving, or investing.
How To Avoid Inflation Affecting Your Finances
While it’s impossible to completely shield your finances from the effects of inflation, there are strategies to lessen its impact. These steps can help you maintain your purchasing power and safeguard your financial wellbeing.
- Budgeting and Spending Wisely – The first line of defence against inflation is effective budgeting. Track your expenses, identify non-essential spending, and adjust your budget to accommodate rising costs. Prioritising needs over wants becomes crucial in times of inflation.
- Increase Your Income – If possible, explore ways to boost your income. This could mean asking for a raise, taking on additional work, or even developing new skills that could lead to higher-paying job opportunities.
- Savings and Emergency Funds – It’s wise to build a robust emergency savings fund that can cover at least three to six months of living expenses, with Money Helper suggesting at least 3 months of essential expenses saved. This fund can be a financial lifesaver during unexpected situations, especially when prices are rising.
- Smart Shopping – Look for deals, use discounts, and consider buying in bulk. Switching to more affordable brands or stores can also make a significant difference in your expenditure.
- Energy Efficiency – Reducing energy consumption can lower your utility bills. Simple things like turning off lights when not in use, using energy-efficient appliances, and improving home insulation can lead to big savings.
Remember, while solutions like bad credit loans are available, borrowing should be a last resort, and used only when you have no other suitable options such as savings. Using them for essential outgoings like your rent or mortgage payments is not ideal and should be avoided, covering only short-term emergency situations if you cannot settle them in any other way.
How To Help Your Finances With Inflation Rising
Navigating through times of inflation isn’t easy, but you can take a smarter approach with some proactive planning. Here are some top tips that can help you manage during the cost of living crisis:
- Debt Management – If you have loans or debts with variable interest rates, such as on credit cards, refinancing them to fixed-rate options may help you avoid rising costs due to inflation. Speak to your lender to see what options you may have.
- Plan for Long-Term Goals – Keep contributing to your long-term goals like retirement, even during inflationary times. Adjust your savings rate if possible to account for the reduced purchasing power.
- Mindful Lifestyle Changes – Small lifestyle changes can add up to significant savings. This might include using public transport more often than driving, cooking at home instead of eating out, or finding free entertainment options rather than expensive cinema trips.
- Review and Adjust Insurance Policies – Ensure your insurance coverage keeps pace with inflation. For instance, if you have home insurance, check that the coverage amount aligns with current replacement costs.
- Adjust Your Investment Strategy – Inflation can erode the value of money, making it essential to invest wisely. Consider diversifying any investments you have to include assets that historically perform well during inflation, such as certain stocks, real estate, or commodities.
- Increase Financial Knowledge – Staying informed about economic trends and financial advice can help you understand the wider economic environment. This can help you make better financial decisions.
- Seek Professional Advice – Of course, if you’re unsure about how to adjust your financial plan, consider consulting a financial advisor. They can provide tailored advice based on your own circumstances.
Inflation can be challenging, but with careful planning and strategic adjustments, you can maintain control over your finances. As we said, there is no quick fix, but these tips can help you make informed decisions that align with your financial goals and circumstances.
Investing Money Through Inflation
Investing during times of inflation can seem daunting, especially if you’re new to it. Here’s a straightforward list of some investment options that can help:
- Government Bonds for Inflation Protection – These are special bonds called UK index-linked gilts, issued by the government that adjust with inflation, helping to keep your investment safe as prices rise.
- Shares in Companies (Equities) – Investing in company shares can be a good idea during inflation. Some companies manage to do well even when prices are going up, which can make their shares more valuable.
- Investing in Property (Real Estate) – Property can be a good investment when prices are rising. The value of property and the rent people pay often go up with inflation, as many people have experienced in recent years.
- Commodities Like Gold or Oil – Buying commodities means investing in physical goods like gold or oil. Their value can increase with inflation, offering a way to protect your money.
- Mixing Your Investments (Diversification) – It’s wise not to put all your eggs in one basket. Mixing different types of investments can help protect your money.
- Keep Checking Your Investments – It’s important to keep an eye on your investments and make changes if needed.
Remember, all investments have some risk, and what’s right for someone else might not be right for you. It’s important to think about how much risk you’re comfortable with and what your financial goals are before you decide to invest. Money Helper has a beginner’s guide to investing that can help you further if you are unsure where to start.
Inflation Proofing Finances – It’s Not Easy, But Your Finances Can Improve
With a balanced approach of smart budgeting, wise investing, and proactive financial planning, you may be able to ride the wave that is rising inflation. By understanding the nature of inflation and adopting these strategies, you can safeguard your finances and maintain your purchasing power.
Remember, while inflation poses challenges for all of us, with the right tools and knowledge, you can confidently manage its impact on your personal finances. Below are some helpful links to help you further:
- Money Helper’s Budget Planner – a free budget calculator to see how your money is being spent.
- Money Helper’s Bill Prioritiser – a free tool to help you prioritise your monthly bills.
- UK Inflation Rate Calculator – a free tool to help you see how rising prices affect you.
- Help For Households – a UK Government site to help you find support options during the cost of living crisis.