4 Steps how to inflation-proof your finances

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Personal finances have had a difficult year in 2022. Bad market performance, excessive market volatility, and geopolitical pressures have conspired to cause even the most seasoned investors to be concerned about their financial condition. Add to it the fact that inflation has reached levels not seen since the early 1980s, and it has become critical to rethink your financial strategy.

What exactly is inflation?

Inflation is a measure of how much goods and services cost over time.

When prices rise, £1, £10, £20, or £100 buys less than it did previously, and your money is worth less.

Cadbury’s Freddo chocolate is a popular tool to demonstrate the impact of inflation. This little frog-shaped chocolate bar cost 10£ in 1999, but it now costs 25£. If you had £10 in 1999, you could have purchased 100 Freddo bars, but that same £10 today would only buy 40 Freddos.

Better for your waistline, but not so good for your cash.

Check out our post on CPI vs RPI inflation to learn more about how inflation is measured, why it’s so high right now, and what it means for your money.

Protect your savings against inflation.

Everyone needs money set aside for an emergency fund, but inflation and savings do not mix well.

When inflation rises, your funds lose value. If the interest rate is high enough, it can help to offset inflation. In the year to December, inflation was 10.1%.

While the highest paying savings accounts are currently pushing 5%, it is not close to 10.1%, so the interest you are receiving does not totally prevent your investment from losing value. They are, nonetheless, the finest option for storing emergency reserves.

The greatest rates are usually found with newer online-only and app-based banks rather than the big high-street banks, so shop around. We’ve compiled a list of the top savings rates.

If you have any extra funds aside from an emergency fund, you might lock them up for a set amount of time because they tend to pay more. But, you must confirm that you will not require this money before the conclusion of the period or you may be fined.

If the interest rate on the loan is higher than the best savings account, it may make sense to use excess resources to pay off a loan or mortgage instead.

Examine how rising inflation will affect your financial plan.

In any financial plan, inflation is a key assumption. Based on their long-term predictions, Canada’s financial planning regulatory agencies continue to recommend utilizing an inflation forecast of 2.1% in 2022.

Your financial planner should simulate alternative scenarios for your financial plan that include greater inflation assumptions (for example, 3%, 4%, and 5%). You can better appreciate how rising inflation may affect your chances of meeting your goals if you compare your base financial plan with plans with higher long-term inflation assumptions.

Examine your investing asset mix.

Inflation reduces the purchasing power of your savings, and when combined with the recent market slump and increasing volatility, you may be at danger of failing to meet your financial objectives. To assess whether your existing assets are well positioned to fulfill your financial goals, your financial planner should review your current asset mix, the suitability of your present investments, and your risk tolerance.

Examine your debt to see if there are any options to lower debt and/or interest payments.

To address high inflation, the Bank of Canada has steadily raised interest rates. As a result, variable rate mortgages, credit cards, and some loans are all more expensive. It is now more crucial than ever to look for solutions to lower your debt costs.

Consider consolidating high-interest credit card debt to reduce your overall interest costs; if you have investments in a non-registered investment account, consider selling as part of your portfolio review to pay off any high-interest non-deductible debt; and consider whether it is time to lock in your variable mortgage loan.

Examine your budget to see where you may save money.

Many of your expenses have risen due to rising inflation. Also, your income may not be keeping up with inflation. Reduced spending might free up funds for debt repayment or investment. All you have to do is get an advance check stub maker and enter all of the information such as state, working hours, and how you get paid.

Consolidating debt to minimize interest charges, deferring significant purchases, renegotiating insurance premiums on policies, eliminating unnecessary digital subscriptions, and cutting back on non-essentials like entertainment, holiday budget and restaurants by cooking more at home are all ways to cut costs. If your pay has not kept pace with inflation, you should consider asking for a wage increase, negotiating more employee benefits, or, if that fails due to the present job market, looking for a new job.

If you are self-employed, there are numerous deductions and credits that you should discuss with your financial counselor. Employees should search for ways to maximize their donations and medical expense deductions before the end of the year, and they should also make sure they are claiming the Employment tax credit, Teachers’ school supply tax credit, and Volunteer FireFighter credit.

Finally, if you pay income tax installments based on the previous year, run a tax estimate to determine whether you may reduce or eliminate your December 15th installment.

Conclusion

With inflation on the rise, it’s more crucial than ever to double-check your financial strategy. Your financial planner can work with you to update your financial plan and determine which solutions are appropriate for your situation.