4 Steps how to inflation-proof your finances

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Personal finances have had a difficult year in 2022. Bad market performance, excessive market volatility, and geopolitical pressures have conspired to cause even the most seasoned investors to be concerned about their financial condition. Add to it the fact that inflation has reached levels not seen since the early 1980s, and it has become critical to rethink your financial strategy.

What exactly is inflation?

Inflation is a measure of how much goods and services cost over time.

When prices rise, £1, £10, £20, or £100 buys less than it did previously, and your money is worth less.

Cadbury’s Freddo chocolate is a popular tool to demonstrate the impact of inflation. This little frog-shaped chocolate bar cost 10£ in 1999, but it now costs 25£. If you had £10 in 1999, you could have purchased 100 Freddo bars, but that same £10 today would only buy 40 Freddos.

Better for your waistline, but not so good for your cash.

Check out our post on CPI vs RPI inflation to learn more about how inflation is measured, why it’s so high right now, and what it means for your money.

Protect your savings against inflation.

Everyone needs money set aside for an emergency fund, but inflation and savings do not mix well.

When inflation rises, your funds lose value. If the interest rate is high enough, it can help to offset inflation. In the year to December, inflation was 10.1%.

While the highest paying savings accounts are currently pushing 5%, it is not close to 10.1%, so the interest you are receiving does not totally prevent your investment from losing value. They are, nonetheless, the finest option for storing emergency reserves.

The greatest rates are usually found with newer online-only and app-based banks rather than the big high-street banks, so shop around. We’ve compiled a list of the top savings rates.

If you have any extra funds aside from an emergency fund, you might lock them up for a set amount of time because they tend to pay more. But, you must confirm that you will not require this money before the conclusion of the period or you may be fined.

If the interest rate on the loan is higher than the best savings account, it may make sense to use excess resources to pay off a loan or mortgage instead.

Examine how rising inflation will affect your financial plan.

In any financial plan, inflation is a key assumption. Based on their long-term predictions, Canada’s financial planning regulatory agencies continue to recommend utilizing an inflation forecast of 2.1% in 2022.

Your financial planner should simulate alternative scenarios for your financial plan that include greater inflation assumptions (for example, 3%, 4%, and 5%). You can better appreciate how rising inflation may affect your chances of meeting your goals if you compare your base financial plan with plans with higher long-term inflation assumptions.