… the worst is yet to come, and 2023 will feel like a recession for many people. - International Monetary Fund (IMF)
So you went to the supermarket and found out that the bread roll you bought last time is now more expensive. You were taken aback by the sudden price hike and pondered why it had happened. Or maybe you've been keeping up with the news and are aware of inflation, but you still can't believe how quickly costs have increased, leaving you to wonder how you'll be able to afford everything on your grocery list.
You are not alone in this struggle. Many people across the world are dealing with the same problem, having to be creative with their budgeting so that they can still purchase essential items.
According to an article by Reuters, rising costs for basic necessities like food, transportation, and housing are causing inflation to reach levels not seen in decades. The effects may worsen more, however close we may be to a peak.
But what has got us here?
After the outbreak of COVID-19, governments and central banks provided trillions of dollars in aid to lockdown firms and people in order to keep them afloat. This ended a long and comfortable era of low inflation and interest rates.
That safety net prevented people from losing their jobs, companies from going under, and home values from plummeting. But it also threw the balance of supply and demand completely off balance.
In 2021, when lockdowns were lifted and the world economy grew at its fastest rate in 80 years after a recession, the influx of stimulus funds overwhelmed the world's trading system.
Even worse, the economic boom caused energy prices to go up, and factories that had been shut down couldn't start up production fast enough to meet demand.
On top of these things, gas prices went up even more in March of last year when Russia invaded Ukraine and the West imposed sanctions on a major oil and gas exporter.
With inflation affecting almost all aspects of our lives, it is important to find ways to cope with it. But before we get to it, let's take a closer look at what happens to money during inflation.
What happens to money during inflation?
Inflation happens when demand exceeds supply. Due to rising demand and stable supply, prices rise.
Everyone is feeling the effects of this inflation as the value of their money drops along with the cost of living.
What are the costs associated with inflation?
Inflation comes with a number of associated costs.
- Erodes Purchasing Power
First and foremost, inflation erodes the purchasing power of money; as prices rise, a given amount of money is able to buy less than it used to. This can be particularly problematic for people on fixed incomes, as their money is unable to keep up with the rising cost of living.
- Devaluates Currency
Inflation can lead to the devaluation of currency, which means that individuals must often work harder and longer in order to earn enough money to pay for their basic needs.
- Reduces the Value of Savings
Inflation reduces the value of savings, as the same amount of money will not be able to purchase the same things that it was able to when you first saved it. People who want to use their savings for things like retirement may be hit especially hard by this since their money will not stretch as far in the future.
- Increases Interest Rates
Inflation brings about an increase in interest rates as banks and lenders charge more for loans to offset their own losses from the inflated currency. This in turn can make it more difficult for businesses and individuals to borrow money, leading to reduced investment and spending.
- Causes Uncertainty
Inflation can cause uncertainty in the business world; companies may be hesitant to invest or hire if they cannot predict how much their expenses and revenues will increase in the future.
- Results in Wage Stagnation
Inflation can result in wage stagnation; employers may be unwilling to offer raises or increase salaries in the face of rising prices.
When wages aren't raised to keep up with inflation, it becomes even more difficult for workers to afford the goods and services they need, leading to an endless cycle of declining buying power.
Just how exactly are you going to deal with all the consequences of inflation?
Budgeting and planning ahead can help you cope with the effects of inflation and stay financially sound despite the ever-fluctuating prices of goods and services.
How does inflation affect budgeting?
Inflation can make budgeting an unpredictable task. Why? Because of the uncertainty of inflation, it is difficult to predict how much money will be necessary to purchase items over time. And as prices rise, you must constantly adjust your budget to account for the increase in costs.
To combat this, you must be mindful of your budget and keep up with inflation trends to prepare for the rising costs of goods and services.
For businesses, inflation causes difficulty in forecasting and budgeting since they may have to adjust their prices to remain competitive while still covering the higher costs associated with inflation. Furthermore, they may be forced to accept smaller profit margins to remain competitive because they may not be able to charge consumers more than their competitors.
If you are a business owner, you will need to increase your business’s efficiency and productivity to keep costs down while still delivering the same quality of products or services.
How to budget for inflation
How do you survive financially during inflation?
Individuals/Households
- How to prepare for inflation at home You can prepare for inflation at home by budgeting carefully, with an eye towards increasing prices.
- How do you budget against inflation? i. Start by writing down all of your current expenses, such as rent, utilities, food, and other items.
- Find ways to make more money so that you can put away even more money.
- Make adjustments to your budget by eliminating unnecessary expenses and finding ways to save money on things that you need.
- Look for other ways to protect your money against inflation, such as investing in stocks or bonds, which tend to have returns that outpace the rate of inflation.
- How to save on groceries during inflation? Groceries are one of the biggest expenses for most households, and during inflationary times, they can become even more costly. Fortunately, there are ways for you to save on groceries during times of inflation.
- Shop in bulk.
- Buy Store Brands.
- Use Coupons Couponing can be a great way to save on your groceries during periods of inflation. Coupons are widely available both online and in newspapers, offering discounts on everything from produce to household items. By combining the savings of store brands with coupons, you can significantly reduce the cost of grocery bills.
- Comparison Shop
- Take Advantage of Sales When you do your grocery shopping, keep an eye on sales and discounts, so you can stretch your money as far as possible. It's also a good idea to sign up for promotional emails from your favorite stores so you can find out when they have special offers.
- Stock Up
- Go to the Farmers’ Market
Creating a budget and tracking your spending is the best way to prepare for inflation. As prices rise, it's important to make sure that you're not overspending, and putting away as much money as possible for future expenses. Setting aside some extra money each month, even if it is just a small amount, will help you be prepared for unexpected increases in the cost of living.
ii. Next, calculate how much money you will need to cover those same expenses if prices rise in the future. Once you have a good idea of your future needs, set aside a portion of your income to cover those expenses in the event that prices rise.
iii. Then, determine how much money you will need to save each month in order to maintain your current level of spending.
iv. Create a financial plan that includes saving and investing a portion of your income to help offset the effects of inflation.
v. Finally, review your budget regularly and adjust it as needed in order to stay ahead of inflation.
Shopping in bulk is one way to save on your groceries during inflation. Buying in bulk allows you to take advantage of the lower prices that larger quantities often offer, resulting in a much lower cost per item.
Another way to save on your groceries during inflationary times is to buy store brands.
Store brands are often less expensive than name brands, and with the advent of technology, store brands have come a long way in terms of taste and quality.
Taking the time to comparison shop and compare prices can help you save even more money.
Stocking up on non-perishable items when prices are low can help you reduce grocery costs during times of inflation.
Shopping at a farmers' market is a a great way to lower your grocery bill.
Farmers’ markets generally offer produce and goods that are locally grown and in-season, which often cost much less than items at the grocery store.
By following these tips, you can better manage your expenses when there is inflation, keep your budget in check and be free from financial worries.
Small Business Owner
How to Adjust Your Small Business Budget for Inflation
As a small business owner, it's essential to be aware of the impact of inflation on your budget. There are several things you can do to ensure that your small business continues to thrive during inflationary times.
- Review your budget regularly and make sure it is up to date with the current market conditions.
- Be aware of any government policy changes that may affect your business, as these could lead to higher costs for goods and services.
- Evaluate the pricing of your goods and services and determine if they need to be adjusted in order to remain competitive
- Look for ways to reduce your business expenses and increase efficiency in order to keep costs down.
Cut your costs by:
i. Renegotiating contracts or looking for discounts.
ii. Finding alternative suppliers who can offer better value for money.
iii. Reviewing your business processes to find ways to make them more efficient and cost-effective.
iv. Using technology to automate or streamline any manual processes that are taking up too much of your staff's time and resources.
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Conclusion
Even if inflation is inevitable, there is no need to worry. There are many ways for you to beat its effects, whether you are an individual, a household, or a company.
Proper budgeting, saving, and cutting back on unnecessary expenses will help you weather the impacts of inflation and keep your finances in good shape.
If you're a business owner, you may lessen inflation's effect by taking steps to reduce your business’s overhead costs and improve its operational efficiency.
Spending some time learning about inflation and putting the advice in this article to use can put you in a better position to handle your money in the face of rising prices.