Currently, many media are highlighting inflation and stagflation occurring around the world. Even if a macroeconomic problem sounds serious, it can impact people’s daily lives. For example, if you want to buy fried food for 5 dollars, it doesn’t feel like the amount you can buy is decreasing yearly. If you could get five fruits last year, now you can only get four, even if the size gets smaller. A reduced amount of fried food that can be purchased indicates a price increase. That’s a simple explanation of inflation. Let’s discuss about financial tips against inflation and stagflation further.
In simple terms, inflation can be interpreted as a general and continuous increase in the price of goods and services over some time. While stagflation comes from the word stagnation, inflation is defined as economic growth that continues to slow down, accompanied by continuous price increases. The everyday effects of inflation and stagflation reduce people’s purchasing power and can increase unemployment. So what can we do to anticipate the impact of inflation and stagflation?
Financial tips against inflation and stagflation
You can start managing your finances. Here are some financial tips against inflation and stagflation you can do and apply. Surely these tips will get you through a financial crisis should it happen. Let’s check out the information below!
1. Manage financial items
You need to anticipate price increases by rearranging your financial items. Start separating the need and want things. You also need to save money by putting off non-urgent purchases of goods. Of course, it would be better to shop or consume when economic conditions have improved.
2. Set up an emergency fund
You need to set up an emergency fund, which is a special fund set aside for unexpected needs. This emergency fund anticipates terrible things that can happen during stagflation, like pay cuts and even layoffs. For single ones, you must set up an emergency fund of at least six times the cost of living per month or 12 times the cost for married couples with dependents.
3. Looking for additional income
Saving may be able to sustain personal finances during a recession. However, increasing cash flow or income would be safer to strengthen emotional and financial health further so that additional cash goes into your wallet. This gives you more money to save or invest in preparing for inflation. You can find extra income alongside the primary income. This can be done, for example, through business through online platforms or hustle jobs that can be adapted to your hobbies. Extra money doesn’t mean lifestyle increases too. When inflation rises, you keep saving, and money from other income can be used for preserving or investing.
4. Live frugally
When prices go up, start saving by only buying what you need, fundamental necessities. Another economical solution you can do, for example, we are used to driving private vehicles to work every day, try reducing the frequency to once every two days by occasionally taking public transport. Try to bring lunch from home within a week. Also, try to choose local products that don’t incur import fees when shopping. This aims to allocate more money to emergency funds, paying off or reducing debt, and investing. This financial tips against inflation and stagflation also can change your behave at manage money.
5. Invest according to the risk profile
Inflation can reduce the actual value of money, so investing is essential! You can choose investment vehicles whose returns are higher than the inflation rate. For example, inflation was 4.94% in July 2022, then invest in the Retail which offers a coupon of 5.9%, which means that the return on investment yields a higher profit than the current rate of inflation.
Of course, every investment involves risk, so choose an investment vehicle that suits your risk profile and be aware of your financial liquidity. Only invest some of your money in risky investment vehicles because inflation and stagflation are unsettling the economy. One of the investment strategies you can use is hedging. Then what is hedging in the investment world? Hedging is a strategy investors or traders use to eliminate or reduce the risk of loss in the face of unpredictable economic changes. Hedging can be done through diversification and average investment funds.
Diversification means you need to place mutual funds in different sectors or instruments. When an investor invests their money in only one device, the risk of loss you run is very high if the investment instrument falls in price. Investing in various tools like stocks, mutual funds, or bonds is different. Therefore, if the store suffers a loss, there is still an opportunity to profit from other investment vehicles. In addition, Average Down means gradually buying investment products when prices fall. So if the investment value increases, investors receive profits that can cover losses in the first investment period.
This is an explanation of financial tips against inflation and stagflation. If you manage your finances wisely, you will be more optimistic about various economic situations. Let’s be confident that the economy will recover faster and grow stronger.