In this article, we will discuss how to combat inflation and overcome its effects. We will provide tips and strategies for dealing with rising prices of goods and services and their impact on your personal budget and investments. We will focus on the necessity of adjusting the budget, reducing spending, reallocating the investment portfolio, and paying off debts. These strategies will help you maintain financial stability and mitigate the impact of inflation with minimal damage.
Adjusting the Budget
First, review the necessary items in your budget, such as nutrition and housing. Although you may not have much control over rising rent costs, you can ensure to allocate more money in your budget for bills and other expenses. This way, you will have a better chance of covering basic needs without resorting to credit or tapping into savings.
Reducing Spending
Second, reduce spending on non-essential items. This doesn’t mean you shouldn’t enjoy time with family and friends, but it may be wise to cut back on spending in these areas as they become more expensive. Travel costs such as hotels, car rentals, and airfares have increased by more than 20% compared to last year, while the cost of going to movies, concerts, and sporting events will increase by up to 10%.
Reallocating the Investment Portfolio
Inflation will also affect your investment portfolio, so now is the time to reallocate it to mitigate the risks that inflation may cause. Long-term bonds are negatively impacted by rising inflation as it affects their purchasing power. Thus, you should reduce the number of long-term bonds in your portfolio.
When considering investments that may help mitigate risks, you should look into investing in TIPS, or Treasury Inflation-Protected Securities. Unlike other bonds, the interest rate paid is linked to inflation, so it will increase when inflation rises and decrease when inflation falls.
Another way to protect your portfolio is to invest in companies with pricing power. When inflation rises, some companies can pass on price increases to consumers, so their revenues are not affected by higher operational costs. This is beneficial for investors in those companies.
Paying Off Debts
You should also try to manage debts. During periods of excessive inflation, the central bank raises interest rates to combat inflation, which may affect you if you have debts. Higher rates make borrowing more expensive, so you should pay off any credit card debts to avoid spending more on purchases you’ve made previously. The central bank has raised interest rates once already this year, and more hikes are on the way, so try to reduce your debt load as borrowing will become more costly.
We hope that inflation eases as interest rates rise, leading to lower prices. But until that happens, some of these tips and tricks should help improve your financial situation.
Good luck!
– Christine
If you have any questions about money, Christine is here to help. Submit an anonymous question and she may answer it in a future article.
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Sources:
- Bureau of Labor Statistics. “Consumer Price Index Summary”.
- Bureau of Labor Statistics. “Real Earnings Summary”.
- Bureau of Labor Statistics. “Consumer Price Index Detailed”.
- Securities and Exchange Commission. “Bonds”.
- TreasuryDirect. “TIPS Detailed”.
- McKinsey. “Passing the Buck”.
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