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Navigating Your Finances Through High Inflation

Monday, July 24, 2023

Written By

Navigating Your Finances Through High Inflation Andrew Fong
Navigating Your Finances Through High Inflation

Financial Advice | Financial Planning | Investing

Inflation is the broad rise in prices for goods and services over a period of time and is a widely used economic indicator. Globally, inflation is running high, and each Central Bank has different acceptable levels for their economies.  As an example, in developed economies, central banks look to have a 2% annual target for inflation. However, is expected that most will fail to meet that throughout the remainder of 2023, or indeed in 2024.

It’s not just the rising costs that are challenging, cash flow can also suffer during periods of rising inflation, particularly if you are on a fixed income, as more of your income is used buying the same day-to-day items, it can leave less disposable income to allocate to your long-term savings or investments.


Here are some of our insights to help you navigate through high inflation.


Creating a budget and cutting costs

Creating a budget stands at the core of effective cash flow management, as a well-managed budget not only helps you keep track of your spending but also provides critical insights into where your money is going.

Areas that are hit by rising prices are far-reaching and can include groceries, services and utilities, despite being essential, there may still be ways to save money.  Companies can and do reward loyalty, so perhaps agreeing to a longer contract, or using discounts/ money back solutions can help you save. Ultimately, your budget will be the best way to reflect on areas where you can save the most by giving focus.

There is a millennial joke floating around on LinkedIn and Twitter in backlash to those who claim that if you want to get on the housing ladder, it’s best to put down the avocado toast and Starbucks coffee. But, the joke (see below) scores a bit of an own goal here, because £18,250 (buying a £5 iced latte a day for 10 years) is a lot of money even if you ignore compounding growth. It really is enough for a down payment on a modest apartment in most of the UK, or a house if you’re co-buying.


(Click Here To See Twitter Post)

The argument shouldn’t be about what other people spend their money on, as only you can decide which one you value most. Having a budget presents this information to you so you’re informed - would you brew home coffee for 10 years to save £18,000?


Focus on high-interest debt and stay liquid

Interest rate hikes tend to follow periods of higher inflation, so carrying any high-interest debt, such as credit cards and car financing, can be a significant drag on your financial well-being, during inflationary periods, particularly if the rate you pay is variable.

Generally, the annual interest on high-interest debt is greater than the annual returns of your investments elsewhere, meaning debt takes priority.

It can snowball quickly, and missing repayments can damage your credit score.


Choosing the right investments

Investing intelligently can offer a protective shield against inflation. However, your investment choices need to be well-thought-out, considering your risk tolerance and potential returns.

Investing in assets that are likely to appreciate, such as stocks and real estate, can typically help you keep pace with or even outstrip inflation over a longer period.

However, it’s important not to hastily change your risk profile or long-term strategy in chasing high returns to combat increasing inflation. If cash flow is a problem due to the higher cost of living, consider focusing on dividend-paying equities or income-producing assets, as the additional income will be useful.  However, be mindful that by doing so you might trigger some income or capital gains tax liabilities.

Conversely, it may not be equities - which are typically a high returning asset - that you use to combat inflation. Inflation-Protected Securities (IPS), which often utilise debt securities, are investments specifically designed to counter inflation. This is because debt yields interest, and interest rates are rising in order to combat inflation.

Ultimately, diversification is a golden rule of investing that holds true during all types of environments, particularly inflation. Don’t focus on just debt or equity, but instead spread your investments across varied asset classes, and across varied geographical regions.

Lastly, it’s important to stay informed about the economic landscape, which is constantly changing. Last winter, UK property was forecasted to fall significantly. Then, in Spring, they experience some growth and surprised many analysts. Today, we are back to a possible mortgage crisis and declining prices.

Instead of placing too much importance on single headlines, we should understand the bigger picture and find trends over time. So, in the example above, the moral of the story is less about which direction house prices are going this month, and more about there being huge uncertainty and high volatility this year.


Managing emotions in uncertain times

The battle against inflation can be arduous to go at alone. With a wealth planner by your side, it can be much easier to ride out the current inflationary headwinds.

We closely work with you to understand your financial goals. By knowing your unique situation (relationships, assets, businesses etc.), it’s possible to craft a personalised investment plan to help you reach your financial objectives, even amidst high inflation.

Maintaining a balanced and well-diversified portfolio is a core investment principle. Not only as a way to reduce risk, but in keeping the portfolio constantly aligned with your risk tolerance and strategy. Volatile markets can destabilise a portfolio very quickly, so it’s important to have someone to ensure your portfolio is optimally balanced at all times.


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