HOW TO PROTECT YOUR PERSONAL FINANCES FROM INFLATION. (FOR CHRISTIAN MILLENIALS)

Estimated reading time: 9 minutes

Maybe you have heard the term inflation thrown around for a while and you would like to know more about it. Today I want to talk about inflation, what it is, the good, and the bad. Inflation is one of those things that can create havoc and instability in a country. So what is it?

• Inflation definition.
• What then causes inflation?
• How inflation affects the different areas of personal finance.
  • How does inflation affect your income and your spending?
  • Practical ways you can protect your income from inflation.
  • How does inflation affect your savings and investments?
  • Anyway, back to our point. Some areas you can invest to protect your investments include:
  • How does inflation affect protection?
  • health insurance?
• Conclusion

Inflation definition.

According to the IMF, inflation is the rate of increase in prices over a period. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

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And just to give you an example, inflation represents the purchasing power of $100 now compared to the previous year. Are you able to buy the same basket of goods you could this year as you did last year? If yes, then that means there has been no inflation. If not, and your purchasing power with the same $100 is less than last year then the inflation rate is calculated as the current year-previous year. So if the CPI was 110 last year and this year it is 120 then the inflation rate is 120-110= 10..

CPI is The cost of the basket of commonly purchased household items at a time expressed relative to a base year. ( This basket is kept constant to give a more accurate representation). CPI is divided into 8 major categories which are food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.

What then causes inflation?

The number one reason is the lax monetary policy. Simply put this is when there is an oversupply of money relative to the size of the economy. When this happens the value of the currency diminishes(fall in its purchasing power) which in turn leads to inflation.

When there is a supply shock that is there is a disruption in the supply side, demand goes up meaning there is more money than there are available goods. This then leads to an increase in prices leading to inflation (cost-push inflation). The opposite, which is a demand shock, leads to (demand-pull inflation).

Expectations also play a key role in determining inflation. If people or firms expect higher prices, they build these expectations into wage negotiations and contractual price adjustments (such as automatic rent increases). This behavior partly determines the next period’s inflation. And the extent to which the expectation rises, inflation goes with it.

How inflation affects the different areas of personal finance.

To best understand the effect of inflation on your finances, we need to know the five areas. We then need to analyze each area to give you a better view of how each area is affected and ways you can protect yourself if any. The five areas of personal finance are:

• Income
• Saving
• Spending
• Investing
• Protection

Now let’s look at each area and how inflation affects them.

How does inflation affect your income and your spending?

Inflation does not directly affect your income. What inflation does, however, is it reduces your purchasing power. When there is a rise in inflation, income does not always increase in tandem with it. Instead, what happens is that your income stays the same. This then leads to you having to spend more to purchase goods and services than you did before.

So in simple terms, inflation does not directly affect your income. It however affects your purchasing power. This means that when inflation goes up, your purchasing power goes down.

A rise in inflation and no change in your income leads to.

• A compromised lifestyle- You will need to cut back on some of your expenses and unnecessary wants to accommodate the rise in inflation. This can lead to stress and also an affected peace of mind. Also, it could lead to you becoming demoralized.
• An increase in debt- When you cannot cover your expenses, you will result in debt which then leads to more expenses because you will have to pay it back. Not only that, you will experience a rise in interest rates too. High-interest rates lead to more liabilities, which push your saving rate down.
• Reduced investment- Low purchasing power leads to you spending more on your expenses, in turn, you will have less money to invest. Sometimes, depending on how much your purchasing power has been affected, you could be forced to liquidate (i.e sell) your investments.

Practical ways you can protect your income from inflation.

• Evaluate your expenses. What can you cut back on? There are expenses that you will need to cut back on to ensure that your finances remain intact. Remember that your purchasing power is low, therefore you cannot spend as you used to. This can look like you canceling some of your monthly subscriptions, eating out less, and buying groceries in bulk (hello economies of scale). Whatever you can do to reduce your expenses do it.
• Create a budget and stick to it. At a time when your purchasing power is lower, you cannot afford to spend your money unintentionally. Create a budget and stick to it. This will also help you stay on track to achieve your financial goals as well.
• Prioritize paying down high-interest rates- Examples are credit cards and other loans that have high-interest payments. Pay these ones as fast as you. In the moment it will be uncomfortable, but the payoff will be beneficial in the future.
• Invest more in durable goods- Look beyond now.

How does inflation affect your savings and investments?

Again. a rise in inflation leads to fewer savings and less spending, which inevitably affects your future. After all, that means you will have less money in the bank than you can rely on in the event of an emergency.

But let’s look at how inflation affects your savings.

Let’s say you have $200 in a savings account that pays a 1% interest rate. After a year, you will have $202 in your account. But if the rate of inflation is running at 2%, you would need $204 to have the same buying power that you started with. Again this means your purchasing power is affected.

The solution, however, is to invest your money to get a higher return for your money. Although inflation leads to lower investments, when you decide to invest a part of your savings, then you will end up with more. Every investment has risk tied to it so you should do so wisely. In fact, seek professional help to ensure that you don’t make decisions that ultimately lead you to lose all your hard-earned money. Remember, your situation is unique and you cannot expect to get a unique answer from a general view. Seek professional help always before you make any investment decision.

Anyway, back to our point. Some areas you can invest to protect your investments include:

• Invest in stocks. Stocks can offer protection against inflation if invested with a long-term view. Most companies simply shift the burden of high prices to consumers. This helps them maintain stock prices. While inflation can impact some businesses, essential sectors may always see demand. It is important to look for suitable stock options and invest in them to protect your money from losing its power against rising prices. A financial advisor can help you identify appropriate sectors and companies.
• Invest in gold. Gold has been known as a hedge against inflation. Gold prices move along with inflation and help you protect your money. Since gold is a commodity, its price will increase when inflation rises. Therefore, investing in gold enables you to maximize your return when inflation is high. Further, gold is a highly liquid asset and can be used in an emergency if you lack the funds because of a diminishing income. Just like international investments, gold also helps in diversification.
• Invest in asset-backed investments. Purchasing a property to rent out (either as a holiday let or assured-short hold tenancy), can provide an income that keeps pace with inflation. Inflation often causes a rise in wages, which causes a periodic rise in rental rates, and the return you would get on your investment. Traditionally, property prices have increased at a steady pace, often outstripping the pace of inflation.
• Invest in Treasury inflation-protected securities (TIPS). As the name suggests, they are protected against inflation, so they will protect you from the effects of inflation.

How does inflation affect protection?

According to Investopedia Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

health insurance?

The rise of inflation leads to a rise in medical equipment, treatment, and medicine. This pushes the prices of health insurance up. This especially affects those who are seeking a renewal of their health insurance or are purchasing health insurance for the first time.

And to protect yourself against inflation you need to:

• Opt for insurance inflation protection. This is an insurance policy feature in which the value of benefits increases by a pre-defined percentage at specific time periods to keep up with inflation.  How this works is that they are designed to limit the negative effects of more expensive medical care in the future. Of course, adding this feature to your health insurance means that you get to pay a higher premium than you did before. The best option for insurance inflation protection is an automatic compound annual percentage increase in benefits. This typically adds 3% to 5% to the daily benefit, compounded annually. For those individuals at a younger age and in good health, this is usually the best type of inflation rider. (Investopedia)

When it comes to retirement planning, protecting yourself against inflation looks like this:

• Invest in assets that keep pace with inflation or even surpass it in growth. Examples of these are TIPS, Annuities, and Savings bonds. (Consult a financial advisor to learn more about this)

Conclusion

When it comes to inflation, you don’t have to be afraid. Doing all these practical things is great. In fact, the Bible encourages us to use wisdom in our dealings and to be prudent with our finances. What I want you to keep in mind is that you have God who can and will protect you when you follow what He says. And four things He says that will lead to Him protecting you are tithing, sowing, generosity, and offerings. To learn more about these truths check out my blog post on Biblical financial truths you should know. Just because you now have these practical keys, do not ignore the Biblical truths as well.

• How To Get Over The Fear Of Man
• THE POWER IN ACKNOWLEDGING YOUR PAIN
• The Journey To Becoming Your True Self.
• PRINCIPLES OF PERSONAL FINANCIAL MANAGEMENT (5 UNIQUE KEYS FOR MILLENIALS)
• 7 KEYS THAT WILL HELP YOU MANAGE YOUR FINANCES.

In fact, giving to God guarantees that He will protect your finances. God protected Elijah during a drought, He protected Joseph and His family during the famine. And what He did for them He will do for you. And this is because through Jesus you are now a part of Abraham’s descendants which means you are also part of the Abrahamic covenant. But that’s not even the best part. The best part is that you are a child of God and He promises to guard you and hide you under the shadow of His wings (Psalms 91). Do not be afraid, God is with you and He will uphold you with His right hand.