Overview: Inflation and Its Impact
Inflation is the rate at which the price of goods and services increases, typically measured by the Consumer Price Index (CPI). The CPI is usually calculated by dividing the cost of the basket in the current year by the cost of the basket in a base year and multiplying the result by 100. In this context, the “basket” refers to a predetermined set of goods and services that represent typical consumer expenditures, such as food, housing, transportation, and more.
Causes of Inflation
Inflation arises due to a multitude of factors, including, but not limited to, the following:
- Supply chain disruptions
- Demand for goods and services exceeds supply
- Low interest rates, which may lead to higher spending
- Suboptimal governmental fiscal policies e.g. printing excess money without the economic growth to match
While the reasons for higher prices are many and varied and likely cannot be influenced at the level of the individual consumer, there are ways we can potentially adapt to high prices in our everyday lives.
How Can You Cope?
Below, discover seven strategies to cope with high inflation and its effect on the cost of living.
Strategy #1: Review Your Budget
One of the most important steps to dealing with high prices is reevaluating your monthly income and expenses. Are there any variable or frivolous expenses that you can go without? Perhaps you can cut down on certain spending habits and replace them with more affordable alternatives. For example, you may wish to replace a habit of eating out with cooking at home, given that the latter is the healthier and cheaper option.
Strategy #2: Increase Your Income
You may learn new professional skills, earn a raise or a promotion at your current job, or start a side hustle. Typically an in-demand and well-remunerated skill, programming can be learned entirely online, given sufficient motivation, and is just one example of a rewarding skillset. Similarly, in the age of the Internet, it’s never been easier to sell products e.g. art of your own making online.
Strategy #3: Invest
If you don’t invest your money, its value will diminish over time due to inflation. Conversely, investments in index funds such as the S&P 500 are likely to grow over time due to compound interest. Index funds usually offer a safer investment option for everyday investors. For example, the S&P 500 tracks the market growth of the 500 largest publicly traded companies in the U.S. Examples of these companies may include Apple, Inc., the Microsoft Corporation, and Tesla, Inc. In the long run, the market does tend to grow, so your long-term return on investment will likely be considerable due to the passage of time and the effect of compound interest.
Strategy #4: Start an Emergency Fund
An emergency fund is a necessity given life’s unpredictability. If you’re faced with an unexpected expense such as a job loss or car repairs, you need to have funds to cover it. Start by setting aside a small amount of money on a regular basis. Even $50 a week would result in $1,000 saved over 20 weeks. No matter how small, a regular amount of savings can make the difference between covering your emergency expenses and falling short.
Strategy #5: Increase Your Financial Literacy
Read financial articles and books, take courses on financial literacy, and watch personal finance tutorials. Given the Internet, there are nearly infinite resources for those who wish to improve their financial literacy. We can all benefit from learning more about personal finance, given today’s volatile economic situation. However, use your critical thinking skills – not all advice is created equal. Some voices are worth listening to, while others may offer dubious value. As your financial literacy increases, your ability to think critically will likely improve as well.
Strategy #6: Pay Off Your Debt
Use the avalanche method or the snowball method. The avalanche method involves paying off your highest-interest debt first, followed by lower-interest debt. The snowball method starts with paying off your smallest debt and working your way up. Remember that consistency is key – stick with the method of your choosing long enough to see the desired outcome.
Strategy #7: Practice Patience and Self-Compassion
Throughout this process, practice patience and self-compassion. Emotional intelligence is a big part of managing your finances effectively as impulsive spending and counterproductive financial choices can often be the result of underutilized emotional intelligence. The journey to a better financial life is going to take time, so adopt a long-term mindset and practice persistent perseverance. Then you will be more likely to reap the rewards.
The Bottom Line
Inflation and the associated increase in the cost of living represent an enormous challenge for many Canadians. If you need to cover urgent expenses, apply for a personal loan online via LendProConnect. Follow the above seven strategies as you navigate the challenging economic landscape, and you may improve your financial situation.
