AMERICAN writer Sam Ewing once said “Inflation is when you pay fifteen dollars for the ten-dollar hair cut you used to get for five dollars when you had hair”. American author, economist and political commentator Thomas Sowell mentioned that “inflation is the most universal tax of all”.
As much as we may dislike it, inflation is unavoidable. Over time, rising prices means declining purchasing power.
While inflation is one of the realities of life, recent rising inflation has caught the attention of many people and has raised concerns. The possibility of achieving financial goals such as retirement and children’s education has been doubted.
Here are the four modern day rules of rising inflation to ensure your financial goals are met:
Adjusts spending and reduce leakages
It is certainly not new for spending to be adjusted, but the challenge of inflation makes it a priority.
Keep your spending budget in check by evaluating assorted brands of kitchen utensils; household appliances; apparels; and such. A brand X could offer a greater value at competitive pricing.
With this strategy, we can avoid being eroded 100% by inflation. Spend RM10 a day for a year and you will spend RM3,650. Likewise, adjusting your spending can still help you save. As quoted by Benjamin Franklin, one of the leading figures of early American history, “Be aware of little expenses. A small leak will sink a great ship”.
Take advantage of sales and consider alternative brands
The impact of big-ticket items such as cars and travel on financial planning is enormous. Consider buying a used car or a different car brand instead of sticking with one.
Find the cheapest airfare to fly anywhere in the world during certain months to make your travel plans more flexible and interesting. Think of how much money you have saved during the COVID-19 lockdown when you could not travel.
Make it a habit to only shop during sales. It may be helpful to pace the shopping session or reduce the frequency.
Review financial goals
Make your financial goals more realistic by adjusting it for increasing inflation. According to Investopedia, the mechanisms of how inflation is driven can be classified into three types: demand-pull inflation, cost-push inflation and built-in inflation.
As part of our Alpine Advisory’s engagement, we discussed two types of inflation. The first is general inflation that is inevitable such as the consumer price index which contains goods and services that are essential.
For the second one, we look at is lifestyle inflation which compares spending growth according to individual and family lifestyles or specific expenditures.
It can be hurtful to admit the truth when forecasting the future value of financial goals. The number may seem unattainable in some cases. It is always easier to plan the small amount now than to find the big lump sum later when time is not on your side.
Ensure your plan is best-case scenario-proof and prepare for worst-case scenarios as well. For example, it might be easier to invest an extra RM200 a month than to withdraw RM100,000 later. An adjustment to your risk management premium may be easier than having to pay a shortfall for medical expenses.
Take a fresh look at your investment strategy
In addition to generating more income and reducing expenses, investment planning helps overcome inflation as well. After setting aside emergency funds, most money can be channelled towards higher return investments based on the risk profile and time horizon of the financial goals.
Sound investment planning can take the market ups and downs into account while achieving future financial goals. It may seem uncertain and complicated but investing in your financial future will bring you satisfaction, peace of mind, and great rewards.
Consider speaking with a licensed financial planner. Inflation and interest may be included in your financial planning by a financial planner who has a fiduciary duty to help you manage your money well. – Aug 14, 2022
Kelly Wong, CFP is a CEO of Alpine Advisory Sdn Bhd and a certified member of the Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
