Protecting your financial wellbeing as the cost of living rises

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Protecting your financial wellbeing as the cost of living rises

Global uncertainty has led to the rising cost of most household goods and services. For a majority of people, this has resulted in rising prices at their local supermarket and more expensive fuel to heat their homes and drive their cars. We refer to this as rising inflation and right now, it’s a major concern.

No matter your financial situation, inflation will impact you. According to the latest MoneyWhizz poll, a high percentage of those in their 30’s and 40’s say they feel financially vulnerable to even small changes to their present financial situation. But even for those in retirement, inflation can also have a very significant impact as it erodes the value of their fixed incomes.

How is inflation determined?

There are two things to remember about inflation. First, how it is measured and second, how it is controlled.

Inflation is measured in Ireland by tracking the cost of a ‘basket’ of goods and services. This includes predictable items such as food, clothing, transport, alcohol and much more. Prices are tracked and reported monthly.

More importantly, how inflation is controlled is no longer a matter for the Irish authorities as this has been taken over by the European Central Bank since the launch of the Euro. Here, interest rates are used as the primary tool to limit and control inflation. The ECB uses a ‘target’ rate of inflation of 2% which means that as inflation rises, it would typically increase interest rates. In fact, with inflation surging, the ECB is broadly expected to increase interest rates later this summer (July probably).

As inflation rises, the value of your money falls. For example, €50,000 today (under a 2% inflation rate) would be valued at €41,000 in 10 years from now. And while some people’s income will adjust to inflation over time, that’s not necessarily the case for everyone.

So how do we combat something we can’t control?

Inflation across the world is rising sharply. This may be of little comfort to someone struggling to pay an electricity bill. But understanding the big picture is important to work towards a stronger, more stable economy, just like it’s important for you to look at the big picture when it comes to your finances and overall financial wellbeing.

Since no one can precisely predict when inflation rises and falls, there are several practices you can start (if you haven’t already) to become more financially resilient.

We’ve broken them down into four categories:

1. Borrowing isn’t a bad thing

For most people, there will be a time when a ‘life event’ will strike. This could include a reduction of income, the arrival of a child, the loss of a loved one. It’s part of life and it’s what we should consider from a planning perspective.

Taking on certain borrowings can have its advantages in some certain circumstances. Buying a home using a mortgage provides for security of tenure. A loan for a car can offer borrowers a secure way to travel to and from work is another example.

Whether you’re saving towards the deposit with the goal of eventually your own home or considering switching your mortgage to another financial institution, it’s important to choose a mortgage that fits your overall budget and financial goal. Either way, committing to a mortgage is likely one of the largest financial transactions  a person can make in their life, so it’s important to be as well-informed as possible before making your decision.

Although the European Central Bank is expected to increase interest rates later this summer, the amount of the increase is widely expected to be in the quarter-percent range. What is will mean is that for every €100,000 borrowed, monthly repayments will increase by about €15 per month.

2. Plan early and often

Creating a personal financial plan is always important and is vital to your overall financial health. A detailed financial plan can be the foundation to a healthy and strong financial future.

Financial planning is an ongoing process that allows you to make the most of your financial capabilities. It can be invaluable in assisting you manage your current financial needs and also, to prepare for your long-term goals, like retirement. A financial planner can help you build a detailed financial plan based on your individual circumstances.

If you already have a financial plan, review it annually. Right now, inflation will impact some aspects of your financial plan so you may need to make some adjustments. 

3. Start saving today

Putting an emphasis towards saving, such as putting money in a tax-free savings account will help you become stronger financially. The most widely used tax free savings option in Ireland presently is through the various pensions options.

Saving money is vital, as it provides financial resilience in times of an emergency.

To stay on a committed savings schedule, try to stay consistent on how much you put away each month. Once you determine how much and how often you want to contribute to your savings goals, you can arrange to set up the automatic transfer and your savings begin to accumulate without lifting a finger. You can read more HERE.

By putting your hard-earned money into savings and investments, that money will work for you regardless of what’s happening in the financial and economic environment.

4. Smart spending

It’s no secret, the cost of living is increasing. Whether you’re a family of four or a single person, you’re likely feeling that you must make your money stretch further these days. It’s how you approach buying decisions that is key to your overall financial fitness.

Create a budget and keep track of your spending. A budget can let you see your spending habits and help you find ways to save. You can use the MoneyWhizz Budgeting Buddy as a useful guide to make your finances visible.

As you populate the Budgeting Buddy, remember that in addition to recording the information, question it too! For example, are you entitled to any tax refunds from Revenue? When it comes to your mortgage and other costs, can you refinance to a better rate. Can you get a better deal on your home energy costs…or on your various protection policies? Remember, any savings will put a little more money back in your pocket and today, every penny matters!

There may be lots of financial uncertainty today and into the future, but you can continue to build your financial resilience by creating and sticking to a budget, continually revisiting your financial plan, putting more in savings and choosing smart investments.

Frank Conway is a Qualified Financial Adviser.

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