No economy ever faces static conditions.
One of the things that constantly moves would be price. Inflation is defined as a general increase in prices and fall in the purchasing value of money. It affects people from all socioeconomic classes.
Inflation can have a significant adverse impact on personal finances. Different people have different ways and means in coping with inflation. Within the context of personal finance, there are key actions one can plan for and take in order to deal with inflation today and tomorrow.
When inflation hits, one can take the time to review the current income stream. What we earn should be the first basis of the kind of lifestyle we maintain and pursue. For many, the salary from employed work serves as the main source of income. Planning for the relevant income stream should address liquidity and also be forward-looking.
In this regard, continuously performing well at work can raise the prospect of higher wages. Attending continuous training and development opportunities can, likewise, help a lot.
When inflation hits, one can take the time to assess if additional income streams would be possible. Dependence on a single income may not be enough especially with changing personal circumstances like a growing family.
The choice of the additional income stream should be aligned with one’s purpose or passion so it would be worthwhile. The choice of additional income stream should not get in the way of living a balanced life. Being healthy and happy for the long haul are more vital than temporary gain.
When inflation hits, one can take the time to review the difference between needs and wants. When prices increase, we must learn how to prioritize things in order to have a sustainable lifestyle.
Needs are basic things like food, shelter and clothing. The challenge is to optimize expenses on needs. Wants are often characterized by our luxuries and these things can either be minimized or taken out completely. Every peso saved from managing expenses helps in managing higher prices in goods and services.
When inflation hits, one can take the time to review the personal budget. The worst scenario is living without any semblance of a budget. It is like going to war against inflation without ample ammunition.
A popular budgeting guideline is the “50-30-20 budgeting rule.” From total income, around 50 percent can be allocated to needs, 30 percent can be allocated to wants and 20 percent can be devoted to saving. Budgeting allows one to be strategic by prioritizing things not just for present inflation but also for future inflation.
When inflation hits, one can take the time to review the level of protection one has. Protecting both life and nonlife concerns are important in coping with inflation. Having the right type of insurance can help one deal with expected rising costs of health care and mortality.
Having the right type of insurance can help support the lifestyle of a family even after a breadwinner moves on to the next life. Having the right type of insurance can help one deal with expected rising costs of maintenance and repair of key assets.
When inflation hits, one can take the time to review where to invest. Putting all of the money in the bank will not be prudent since the inflation rate usually outpaces the savings rate. It is, therefore, important to explore investment.
Whether the investment chosen will be a financial investment or a business, diligent research has to be done so that the potential returns over time from the investment can beat the projected movement of inflation. Past performance and current performance of investments matter.
A good plan against inflation is one that tackles inflation at present and for the foreseeable future. While planning is important, the determination of an individual to commit to the plan will also make a difference. Inflation is thus a challenge that can potentially spur good financial behavior needed for a better future.
Gemmy Lontoc is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 81st RFP program this January 2020. To inquire, e-mail [email protected] or text <name><e-mail> <RFP> at 0917-9689774.