Inflation is currently at its highest level, in five years, of 6.6% (as per Stats SA in June 2014) and is expected to continue to exceed the three to six per cent target band over the next quarter of the year. So how does this affect you? Well, when inflation increases, this typically means that the cost of living goes up. You can expect an increase in the cost of groceries and fuel. For example, according to the National Agricultural Marketing Council, between April 2013 and April 2014, the cost of the basic food basket used to calculate inflation increased by 4.1% from R456 to R475. During this time, the cost of a 2.5kg bag of cake flour increased from R20.43 to R22.60. The cost of 1kg of fresh sweet potatoes went up from R14.10 to R18.07.
While these increases may seem small on their own, the cumulative effect of the cost increases is significant. Remember that at the same time, interest rates are likely to increase, which means that the cost of repaying your debt including your home loan and vehicle finance repayments also goes up!
One of the major dangers related to inflation is that salaries often fail to keep up and you can quickly find yourself having to cut back on expenses merely to maintain the same standard of living. The good news is that there are ways you can inflation-proof your money:
Household billsYour daily shopping is where you are likely to feel the effects of inflation the most. Compare the prices of different products instead of sticking to one brand. When you are making comparisons, take into account the weight and size of the product you are buying and not just the price. Remember that bigger is not always better. For example, buying two packs of nine toilet rolls might be cheaper than buying one pack of 18 toilet rolls.
Salary increasesWhen you receive a salary increase each year, it is usually linked to inflation. This means you are not really receiving more money. Your increase may simply be enough to enable you to meet your increased expenses. The last thing you should be doing is taking on more expenses or splurging on new purchases.
DebtIf you have a fixed interest rate on your home loan and car finance then inflation will not hit you as badly as someone with a variable interest rate on their debts. Regardless of what the inflation rate is, you should always try to keep your debt to a minimum. Pay off the highest interest-bearing debt such as credit cards and store cards as quickly as possible. Most importantly, try not to incur more debt when you have succeeded in paying your current debts off.
SavingsHave an emergency savings fund that you can dip into when the need arises. It doesn’t have to be reserved for an emergency event, you can also use these funds when you are feeling the pinch of inflation. However, make sure that you are able to replenish your emergency fund as soon as possible after you use it.
InvestmentsInvest in equities that aim to beat inflation. These funds will usually be more risky than those that offer lower returns but if you remain invested over the long term (10 to 20 years), then your investment will have the time to beat inflation in the long run.
Electricity costsCut down on electricity costs by implementing savings measures such as energy-efficient light bulbs, installing a solar heating system or using a timer on your geyser.
FuelYou can reduce your fuel costs by making sure your vehicle is serviced regularly. If the engine has to work harder to compensate for parts that are not working at their optimum, it causes a fuel drag that in turn increases your costs. You can also improve your driving habits – maintain a steady speed instead of accelerating and then sharply braking; drive with all the windows up, use the air-conditioner only when absolutely necessary.
These are just a few tips to help you deal with inflation in a practical way and they are also practical money management tips that you could be using regardless of the inflation rate.
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan.