How to Protect Yourself from the Adverse Effects of Inflation

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Written by: Jol Ong

Aside from the pandemic that lingered for more than one year now, there’s another phenomenon that we greatly disfavor – inflation. The term is loaded with too much negativity. It evokes fears of instability, price hikes, and looming poverty. And there is truth to this. Inflation, after all, can be defined as the devaluing of currency. Simply put, inflation is the upward movement of the prices of goods and commodities. This is the reason why your grandparents could buy a brand new car in the ‘60s for the cost of the monthly salary of a minimum wage earner today. This is also the reason why most old people would wax nostalgic over the good old days when life was seemingly easier and everything was more affordable.

So how does the government track inflation? The government  uses what is called the basket of goods.” The basket of goods is a fixed set of products and services availed by the ordinary consumer. This may include basic groceries (bread, meat, milk), utilities (electricity, water, internet), housing costs, medical expenses, etc. The price of the basket of goods is assessed every year and compared to the previous year’s. The figure you get is the Consumer Price Index. By evaluating the trends of the CPI, one can track if the economy is inflating or deflating.

Is inflation good or bad?

Believe it or not, inflation is good. Inflation is a sign that the economy is healthy and thriving. It shows that people have enough money to purchase things. Of course, when demand grows, prices go up. Consumers consume, money goes to manufacturers, manufacturers manufacture, employees get paid, and the cycle of a good economy continues.  Governments welcome and encourage inflation– up to a certain point. Because anything excessive is harmful. Excessive and uncontrolled inflation leads to the things that we have mentioned earlier – price hikes, instability, and looming poverty.

So what is a good inflation rate? The government pegs it at around 2% to 4%. The Central Bank manages this by monitoring the inflation rate and implementing monetary policies to keep it within the range. As of this writing, the country’s average inflation rate is at 4.4%. That may be bad so you better start preparing yourself.

Ways to protect yourself from inflation

The good news is that you can take steps to minimize the effect of inflation on your finances. There are resources online that will have detailed information on how to do this. All you need is a fast and reliable internet service with good data. Streamtech offers fast fiber internet service. There are also  affordable fiber home internet plans to choose from that can also come as a cable and internet bundle. Streamtech also has other amazing products like unlimited internet plans that you can avail.

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In this article, we will cover the basics of inflation-proofing yourself. You do not have to be a financial genius to protect yourself against inflation.

Don’t keep all of your money in the bank.

We have always heard the expression “save for a rainy day.” While the thought behind it still holds true, modern life has given all of us better options.

Think, for example, of a piggy bank. Let us say you saved 100 pesos in your piggy bank. If the inflation rate is 4%, the 100 pesos you have saved will have the value of 96 pesos after one year. And the value will continue to drop as the years go by. Now, most banks give you a 0.50% interest per year. If you put your 100 pesos into a savings account, you do get that .50% interest, but not enough to counter the 4% inflation rate. Money in the bank can grow, but not enough to keep up with inflation.

To be clear, we are not saying that you should withdraw all of your money. We still recommend building an emergency fund because you will still need access to your cash. Keep at least two years worth of your monthly expenses in your savings account. Any amount exceeding this should be invested.

Invest in yourself.

If prices keep going higher, your purchasing power goes lower.  You will notice this if you keep track of your groceries. Last year, 5,000 pesos would get you a cart overflowing with goods. Nowadays, 5,000 pesos barely fills half of the same cart. Now think of your salary. If your pay has not changed for the past few years, you have been getting less and will keep getting less. Unless you ask for a raise. And this is where it gets tricky. Your boss should believe that you deserve a raise.

So invest in yourself. Learn a new skill. Improve your output. Level up your game. If the inflation rate rises, so should you. Get yourself promoted.

And since everyone is working from home nowadays, get a good and fast internet connection to boost your efficiency. You can also use your home internet to sign up for online courses that will help you improve your skills.

Invest in stocks.

Inflation is bad for fixed rate savings, just as discussed with banks and savings accounts earlier. So why not invest in stocks? The stock market is volatile and full of uncertainties, yes. But put your money in companies that will always have demand. For example, pharmaceuticals. Even if the price of medicine rises, people will still buy medicine. So a pharmaceutical company will always offer room for growth. Other industries that may be good prospects would be utilities like water and electricity, food, and tech. Companies in these industries provide something that people will always have to avail.

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The good thing is that with a stable internet connection, you could start investing by opening an account with reputable online brokers. Research the ins and outs of investing online and find out which companies are good to invest in.

Now, investing in the stock market is a long game. The value of your stock may rise and fall in the short term, but it will pay off in the long term.

Invest in real estate.

There is a reason why real estate is always part of every millionaire’s portfolio.

And that reason is that real estate is the quickest way to get rich. Sure, it is a long-term investment, but it is far more stable than the stock market.

The value of land will always appreciate. And once you have purchased a property, there are unlimited options on how to make money out of it. For example, if you invest in a condo unit in a good location, you could have it rented out. There will always be demand for homes and if it is near a business district or school, you will never lose tenants. This is literally a source of passive income.

Buying your own home before inflation kicks in is also good. First, because paying mortgage is better than renting. The property will eventually be yours, after all. Second, because house loans are usually fixed rate. This means that your monthly mortgage payment is fixed. As the years pass, you may be paying the same amount, but its value is becoming lighter. You are paying 10,000 pesos monthly, for example. Every year, the value of that 10,000 pesos goes down. Same principle as the piggy bank example earlier.  To put it simply, your landlord will raise the price of rent to match inflation. When you are paying for your mortgage, it will be the same amount until your final payment.

If you are still in doubt, consider that the wealthiest people agree: real estate is the best investment.

Invest in Mutual Funds.

Not everyone has spare millions of pesos to invest in real estate. Maybe investing in stocks is also too complicated or intimidating for the normal person. Mutual funds are a good option. A mutual fund is an investment company that pools money from different investors. The money is then invested in stocks, bonds, and other assets.

How does this differ from investing in the stock market? Well, when you purchase the stock of a company, you are buying partial ownership of that company. You get voting rights.  With a mutual fund company, they already have a portfolio of investments. You are buying a part of this portfolio’s value.

When you invest in a mutual fund, you are also partially investing in all of the companies in its portfolio. Compare this for example with a person who bought shares from Company A. If Company A does badly, the person’s shares will also suffer losses. In a mutual fund, the investor will only suffer less because Company A is just a small part of the mutual fund’s portfolio.

Income is earned from the portfolio’s dividends and is distributed to the fund owners within the year. If the fund holdings increase in price, you can sell your shares for a profit.

You can read more about mutual funds online and search for trusted mutual fund companies in the Philippines when you have a quick and reliable internet connection.

Do not succumb to lifestyle inflation.

What is lifestyle inflation? It is the increase in spending that follows an increase in income. For example, you get that a promotion and a raise. You used to bring your own lunch, but with the extra money you decide to splurge on food everyday.  The thought of having more money makes you think that you can pamper yourself more. Which is good, but it is also a slippery slope to debt and living paycheck to paycheck.

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Sure you can afford splurging now, but inflation will always catch up and you will find yourself ruining your budget. It is advised to always have a frugal lifestyle. Congrats on the raise, now use the extra cash to build your emergency fund or for investment.

Work within a tight budget.

Now that you know that the value of your money decreases every year, budgeting should be more important than ever. Allocate your income to expenses, investments and savings. Carefully plan your budget for groceries and other purchases. Try to cut down on unnecessary expenses. For example, instead of going out to watch movies, you could stream all of the films you want with an unlimited internet service. Streamtech offers a fast and reliable fiber internet connection for uninterrupted viewing.

If you regularly buy from coffee shops, considering making your own. Too much fuel expenses? Maybe try commuting or riding a bike. Do you really need a gym membership? There are online resources for workouts that you can do at home. Small sacrifices can build up to big savings.

So, is deflation better?

Deflation is the opposite of inflation. This time, prices go low. The rare times when deflation is good is when it is brought about by innovation. For example, the features and specs of top of the line smartphones a few years back is now standard with low to mid-range smartphones today.

Just as inflation, moderate deflation is a sign of a healthy economy because it shows technological progress and increasing abundance. Rapid deflation, on the other hand, precedes an upcoming recession. This is because deflation is a sign of low demand. Without demand, there is less currency in circulation, and less economic activity. The lowering of prices is an attempt by manufacturers to get buyers to purchase their products. 

Inflation is inevitable.

Inflation is not kind to ordinary savings and people who rely on fixed income, like pensioners. This is why adjusting your lifestyle to catch up with inflation is important. You have probably noticed that most of the entries in this article deals with investing. This is because by investing your money, you are contributing to economic growth. Everyone profits. Inflation may be inevitable but that does not mean that you can not be invincible.

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