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How do I deal with inflation

Inflation sucks. It sucks worse when you have a fixed income, or your income isn’t very high. If you don’t have a way to massively increase your income then it’s less about keeping up with inflation or beating inflation but rather enduring it.

Some level of inflation is normal for economies. Like a certain level of unemployment is, strangely enough, ideal for the efficient running of an economy. The problem now is that inflation is running at around 7%, whereas the Reserve Bank’s long-term aim is to keep inflation at a healthy 1-3%. (https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflation).

Enduring inflation is hard. It’s unclear exactly how long it will take for inflation in New Zealand to drop back down to normal levels.

However, it will happen. I would stress this first and foremost as some of the below suggestions to ‘beat inflation’ such as cutting back on spending may be uncomfortable, but at least they (like inflation) won’t be forever. 

Make a budget

The boring and oft forgotten technique for getting on top of your finances. Creating a budget really does put things in perspective. Clearly seeing how your outgoings eat through your income paints a clear picture of where your money is being utilised and can even highlight some potential areas to cut spending.

Cut what costs you can

Firstly, take a hard look at your spending. A hard look. It’s easy to spend money nowadays in the world of convenience. Whether it’s uber eats or subscription services it’s easy to spend money with the push of a button. And in the case of small monthly subscriptions easy to keep paying the reoccurring costs whether you are using the services or not. If you can live without some subscription services (especially if you’ve already watched everything you want to watch on them already), or lower, or reduce your non-essential spending you’ll free up some cash-flow.

Another suggestion which may work for some households is getting rid of a car. Cars can be rather expensive to own when you consider fuel costs, rego/WOF costs, insurance costs & potential maintenance costs. In the age of increased working from home this may be a solution for certain households.   

Shop around

I don’t mean at the supermarket, that’s obvious. I mean shop around with the various utilities you use. Are you locked into a 12 / 24-month plan with your internet, phone or power company? No? Then it may be worth considering jumping ship (loyalty is overrated, and under rewarded).

It’s usually the case that competition in the market breeds competitive rates – sticking with your ole’ reliable company may not be for the best. There are often sign-on bonuses for joining up as companies compete for new customers.

Also, from experience switching power and internet companies can be quite easy - sometimes you can do it fully online. And it’s not just internet/power companies, shopping around on your car, home or contents insurances can also lead to some easy savings as companies look to win more customers from their competitors.  

Pay off variable and expensive debt

Use some of this extra cash-flow to eliminate debt. I’m not suggesting you’ll free up enough cash to pay off your mortgage (if only) but credit cards & after pay facilities with high interest rates will kill your ability to get ahead financially if you don’t get them under control. This is especially true in a high inflation environment.

Make your money work harder for you

If you have money on hand you don’t need for expenses don’t leave it in a bank account with a near 0% interest rate. If you need the money ‘on-call’ at least look for a savings account that provides some level of interest. With inflation as high as it is you’ll still be going backwards in real terms but it’s still better than nothing.

Alternatively, you can invest your money. At McKenzie Financial Planning we believe managed funds are the best way to invest these funds. A managed fund that is appropriate to your risk profile, that you can add to incrementally and if needed withdraw funds is one of the best ways to stay ahead of inflation. Specifically a diversified manged fund that incorporates income assets (bonds and the like) benefits from the high interest rate returns while also featuring growth assets (shares) for capital gains is a solid option for growing your wealth and keeping up with inflation.

The above blog was written by Reid Mckenzie a financial adviser working for Mckenzie Financial Planning (www.mckfp.co.nz).

The above information is general in nature as is not meant to constitute personalised financial advice. Reid recommends seeking personalised financial advice from a registered financial adviser before making financial decisions.