In my entire life, I’ve never actually felt what inflation was, until now. The cost of virtually everything is noticeably more expensive. The price of gas, groceries, eating out at restaurants, and services you pay for, are all clearly more than they were only 12-24 months ago.
Nearly everyone I speak to shares the exact same sentiment.
Knowing that the cost of living is becoming more expensive at a rate we’ve never seen, the question becomes, what should you do about it so your money doesn’t deteriorate?
Let’s break down a few options:
1. Do Nothing and Carry On
If you do nothing and go about living your life like normal, two things will happen:
- Assuming your salary and income remains the same, your savings will slowly diminish, because you’ll be paying more for everything, and more cash than usual will be going out.
- The purchasing power of the money sitting in your bank account will also diminish over time. For example, assuming that inflation is at 10%, and if you have $1000 in the bank and do nothing with it, after 12 months, the purchasing power of that $1000 will be about $900. So that money lost $100 (or 10%) worth of its value.
Unfortunately, most people will fall into this category, and see the purchasing power of their money decrease.
2. Be More Mindful and Save
An obvious solution is to be more mindful of your day-to-day spending, and cut out unnecessary or luxury purchases. Let’s face it, most people spend a significant amount of their money on “wants”, meaning if those purchases stopped, it wouldn’t have any real negative impact on their life.
It takes some discipline to cut out unnecessary spending, especially since we’ve been living in a bubble for the last 15 years, where money was cheap, and people were making and spending more money than ever.
Another way to be more mindful is to look out for discounts. I don’t know about you, but when I see competing brands offering something that I normally buy, and one of them is on sale, I will almost always purchase the item that’s on sale.
So let’s say you cut your annual expenses by 15%. If inflation is at 10%, that means the value of your money is 5% better off compared to option #1 (do nothing).
3. Invest in Appreciating Assets
Sitting on unneeded cash in your bank account is one of the worst things you can do during times of inflation. As per option #1, that cash will be deteriorating at 10% per year at the current rate of inflation (compounded).
Instead, where can you park that cash so the value increases? In other words, If you had $10,000 in savings in the bank, where can you invest it so in 12 months, it’s worth $11,000? Or in two years, it’s worth $12,000?
This is a tricky answer with solutions that will vary widely, and so I won’t even try to provide recommendations. The only piece of advice I would give is to invest in whatever you are confident in and believe in. Whether it’s stocks, real estate, crypto, or your own business – do what you know best.
Historically, assets such as real estate, stocks and gold have been good to hold during times of inflation. Whether history repeats itself again, is unknown.
4. Invest in Yourself
Another way to combat inflation is to earn more income. How can you do this? Level-up your own skill sets so you can take on more responsibilities (and negotiate a better salary) at your job, or learn a new skill to start a side business.
There are so many ways to make a few extra hundred or thousand dollars per month. The tools and resources are at your disposal, you just have to be willing to put in the time and effort (and maybe less Netflix).
5. Make Purchases with Cash Back Rewards Cards
There are many financial institutions that offer rewards cards. For example, I recently signed up with Wealthsimple Cash – on every purchase you make, you get 1% cash back that goes into your Wealthsimple Trading account.
So for instance, if you make a purchase of $100, $1 will go into your Trading account which you can use to buy shares in a company. So not only are you getting 1% back, but you can also take that 1% to reinvest and grow it even more.
This certainly won’t make you rich or anything, but it’s better to be a bit proactive than do nothing at all. Every dollar counts in my books.
6. Liquid Savings Accounts
With interest rates rising, it also means that savings rates will rise. If you’re not the type of person that is comfortable investing in stocks or real estate, savings accounts could be a good option to offset inflation.
Many banks and credit unions are offering savings accounts that pay between 1.50 and 2% right now (as of writing May 26). Although this doesn’t nearly keep up with the rate of inflation, it’s certainly better than doing nothing, as per option #1.
My Closing Thoughts
This is a very difficult time to navigate through, financially and economically. For most of us, what is happening is completely unprecedented. Inflation is rising at a pace not seen in over 30 years. We’re also seeing central banks around the world printing money at levels unseen, which is further pushing up inflation.
Some of the largest companies are tightening their belts, and either laying off workers, or putting freezes on hiring. Similarly, investors are sitting on the sidelines nervously, unsure where to allocate their money with the instability of the markets. This could (and likely will) all have large ripple effects on the broader economy.
Personally, I don’t think there’s a one-size-fits-all solution. All anyone can do is try to make the best decisions for themselves and their families.
Where everyone lands in the next 12-24 months, is anyone’s guess.
At the very least, I just hope more people are awakened to what’s going on and don’t get blindsided.
