How Does Inflation Affect Your Personal Finances?

Although inflation can be caused by different factors, demand-pull and cost-push inflation are the two common causes of inflation:

Demand-pull inflation occurs when the demand for certain goods and services exceeds the economy's ability to produce or meet demands. When demand outpaces supply, it leads to upward pressure on prices, causing inflation.

Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. While demand-pull inflation is caused by an increase in demand when there is a limited supply, cost-push inflation results from increased production costs (for example, the cost of wages and materials). As the cost to create a product rises, so does the price, as manufacturers and retailers factor in the increased cost of making the product into the final price.

There are a few steps you can take to help reduce the impact of inflation and protect your finances.

Make A Budget

Having a budget or spending plan is one of the best ways to control costs. It helps to keep track of your spending and areas in your budget that are increasing. If your cost of living has increased due to inflation, it may be time to reassess your budget. That may mean spending less on certain purchases or determining areas of spending you can improve. Reworking your budget and spending less on unnecessary purchases can help balance out the increased cost of living.

Reconsider Your Financial Goals

When inflation is high, reassessing your financial plan is important to ensure that it will still lead to your desired outcome. Speaking to a professional financial advisor is a great way to help ensure the best possible plan is in place to meet your financial goals, regardless of the circumstances. The sooner you get expert advice about your finances, the sooner you can reach your goals.

Try Alternatives To Cash Savings

Keeping your money in a savings account may seem like one of the safest things to do, and is a great option in the short-term. If you're planning for the long-term (five years in advance or more), then it might be better to put some of your cash into investment products like stocks or mutual funds that have to give better returns than cash over a long period.

Cut Back On Discretionary Spending and Pay Yourself First

When choosing where to spend your hard-earned cash, it is a good idea to distinguish between your wants and what you actually need. This approach is part of paying yourself first, and you may be able to offset some of the increase in your expenses by taking a closer look at your bills, cutting what you don't need and trying to reduce or negotiate the rest.

Increase your Cash Flow

Look for ways to supplement your income. Although there isn’t always a quick or easy way to sustainably increase your income, there are options for earning extra cash to cover more immediate expenses. The more income streams you have, the more secure you are about having enough funds to cover your expenses. You may want to consider part-time jobs or freelance work. Having your own business or “side hustle” is also an option to increase cash flow.

Diversify your investments

Suppose you have savings or extra disposable income and are already investing it in the stock market and other types of investments. Your portfolio is likely to be affected by inflation, and you can reduce the risk of losing money by diversifying and spreading your investments into different investment categories and investment products. A diversified portfolio doesn't guarantee you'll be protected from losses, but it can help lower your risk across different asset classes and sectors. A dip in one investment's value has less impact on the overall portfolio because not all investments will perform poorly simultaneously.

Coping with inflation and staying on track financially can be overwhelming. it’s important to have access to sound financial advice. Our advisors are always here to help answer any questions you may have or help you come up with strategies to help minimize the effects of rising inflation.