Six steps to kind in mind to protect your funds
Everything costs more now – eating, drinking and especially driving. We can thank inflation, which weakens purchasing power — less money in your jeans and fewer goods in your shopping cart.
Canadians who lived through the 1980s remember even more painful inflation lessons. They had to pivot their spending habits to prioritize their needs and desires.
Here are six ways to take back control and help cushion the blow on your household budget.
Create a contingency budget
There are no certainties in life, but the best way to prepare for the unexpected is to have some money set aside for a rainy day.
David Chilton sold over two million copies of a book called The Wealthy Barber and one of the key principles of his plan was to save 10% of your wages every week. Sweep that money into a high interest, easily accessible account that can grow as you are buffering yourself in these turbulent times.
Also make sure to set up additional lines of credit or access to short term loan facilities just in case these rocky times go on for longer than we anticipate. These will help you avoid using your credit cards that traditionally have high interest rates.
Diversification of your investments
A well-diversified portfolio is one of the best ways to manage the impact of rising inflation and rising interest rates on your investments. A balanced portfolio is made up of different asset classes, including traditional stocks and bonds, which help to reduce risk during inflationary periods. Now is a good time to review your portfolio mix and make sure it still reflects your risk tolerance, time horizon and current environment.
Budget, re-forecast and project
In times of high inflation, this plan makes even more sense. Look at your spending and consider eliminating expenses you may not even miss. Skip that takeout meal and pack a lunch for two days a week, for example.
You can still go out or spend money on things that bring you joy, but reevaluate where your money could be better spent. This will increase your free cash flow for setting up the rainy day fund or contingency plan noted in the first point.
Pay attention to your debts
Inflation and debt are linked. When inflation increases, interest rates rise. This means the debt you owe becomes more expensive to pay off. Inflation causes your cost of living to increase and it may take longer to pay down debt.
Make sure to talk to your creditors or bank to see if you can modify your interest rate, consolidate your debt at a lower interest rate or extend your payments over a longer period to reduce your minimum monthly payment.
Shop around for mortgage rates
Although inflation doesn’t directly influence mortgage rates, rates typically rise during periods of high inflation. If you’re a first-time home buyer, you need to choose which type of mortgage is best for you: fixed or variable.
Interest rate hikes don’t directly impact fixed mortgage rates, so the mortgage rate and your monthly payment will stay the same for the mortgage term.
With a variable-rate mortgage, your interest rate and monthly payments will likely rise and fall throughout the length of the term.
Fixed mortgage rates provide stability and may help ease budget concerns. However, if the posted fixed rate is a lot higher than a variable mortgage rate, a variable mortgage may save you money over the term.
Currency protection
For businesses that are working globally, please pay special attention to currency fluctuations based on inflation news. Inflation can be your friend and foe when it comes to global trade. Work with a local bank to develop strategies to create currency hedging strategies to mitigate potential losses.
Finally, in a high-inflation environment, combining portfolio diversification, inflation-linked investments, currency exposure, and disciplined money management is essential to preserve purchasing power and protect wealth.
Regularly reviewing your financial plan and adapting to economic changes ensures resilience against inflationary pressure.
Paul Micucci is a Scarborough business owner.
