How do I beat inflation? Everyone wants to know these days, with the quickly increasing costs of food, energy, rent, used cars, and consumer goods front and centre in our minds. Add on weather-related disasters, supply chain disruptions, and record money printing and deficit spending by governments, and inflationary pressures look downright scary. Since the middle of 2020, living costs have been marching higher in Canada and the United States. In November 2021, for example, Canadian inflation hit 4.7% and American inflation hit 6.8% – these are the highest readings since 2003 and 1982 respectively.
In this article, we’ll look at a few ways to beat inflation and shore up your personal finances.
Staying employed is likely the best thing you can do to combat inflation. This is because wages generally rise over time and inflation-adjust. Therefore, if you’re currently employed, stick with it!
Three other related ideas to consider are as follows: First, ask your employer for an annual Cost-of-Living Adjustment (COLA), which tracks the price of inflation. An annual COLA will help you maintain your standard of living, even if your wages don’t grow otherwise. Second, consider looking for new (and higher paying) jobs. You have very little to lose by applying for jobs in a tight labour market, because you are more valuable to employers than they are to you. Third, strive to add value at work and help your organization excel, or increase your skill set through formal education and training. Doing either (or both) of these activities will further grow your employability and income-earning potential.
Unlike employed people, retirees and the long-term unemployed struggle more during inflationary periods. This is because retirees generally live on fixed incomes, and the unemployed eventually have their benefits run out. Therefore, if you’re retired and are struggling, consider taking on part-time work if you can, or even re-enter the workforce full-time. If you’ve been unemployed for an extended period, try to re-enter the job market, or enhance your skills and then join the workforce again.
Finally, if you’re a business owner, stay in business! Don’t quit, retire, or pack it up. Many of the rules for an employee apply to business owners too. This is because the prices you charge for whatever it is your business does should adjust up over time. The trick will be maintaining your margins in a timely manner.
Reducing expenses is likely the second-best way to fight inflation. If you’re able to cut discretionary costs, you’ll be able to save more or divert funds into items you can’t avoid (e.g., rent/mortgage payments, critical medical expenses, taxes, etc.). If you’re interested in a deeper dive into reducing expenses, consider reading my post on How to Live on Less. This article categorizes expenses by those that can be eliminated, reduced, and negotiated, plus expenses which should NOT be eliminated. After that, you could also read 10 Items to Buy Used, which could help to slice costs further if you can make any of those changes.
Finally, if you don’t even know how much you’re spending, or what you’re spending money on, take a look through your latest credit card statement, learn how to track your spending, and build a budget. These steps will go a long way to improving your financial wellbeing, regardless of the inflation rate.
Pay Down Debt
Depending on your debt load, this can be a critical way to attack inflation. The higher inflation goes, the higher interest charges on borrowed funds will go as well. Therefore, it makes a lot of sense to pay down your debt (eliminate it if possible) and avoid new loans. If you have many debts, it typically makes most sense to pay off your highest interest rate obligations first and then pay off your lowest interest rate debt later.
If you have a mortgage and you’re convinced inflation is going higher, consider refinancing at today’s lower rate, and/or lock in your mortgage for a long time. Though variable mortgage rates are usually lower versus fixed rates and tend to be less expensive over the term of the mortgage, in rising rate environments, this may not be the case, and a fixed rate may provide you with a peace of mind.
Investing wisely is tough even at the best of times, and this topic could arguably be its own article. Nevertheless, here are a few items to consider during inflationary periods. Generally speaking, cash is trash, bonds aren’t much better, stocks, real-estate, and certain collectibles do “okay to good”, and commodities or commodity-related companies do best. Though this is a good rule of thumb, it’s still a vast simplification. The investment outcome for different asset classes or sub-segments within the stock market will have materially different performance depending on many factors, including inflation’s duration, how high inflation goes, and inflation’s causes.
For more on investing, check out Investing for Beginners if you’re new to the topic, Making the Most of Your Investments if you’re a little more advanced, and How to Research Stocks if you’re wondering how to understand equities specifically.
What about crypto, you ask? Unfortunately, it is too soon to say; cryptocurrencies have not been around long enough to know how they will perform. There are strong arguments for and against crypto as an inflationary hedge, but the jury is still out. Ask me again in 30 years.
So how high will inflation go, and how long will it last? Honestly, nobody knows, and everyone is guessing. Yes, some guesses will be more informed than others, but they are guesses, nonetheless. Therefore, diversification and avoiding dramatic moves likely remains the best strategy. This means that instead of throwing everything in commodities, it may make more sense to start out by reallocating some funds from bonds to commodities, and then see how the situation develops.
Rising living costs are at multi-decade highs, and many people are now wondering “how do I beat inflation?” If this is you, I hope this article has helped. The four ideas above should be applicable to most people. Staying employed and reducing expenses should go a long way to fighting back against inflation. From there, reducing debt will help further, and investing wisely should improve your prospects over the longer term. Thank you for reading, good luck, and stay tuned for more articles in the months ahead!
Please keep in mind that I am not a financial advisor, and the opinions expressed are my own. My Money Moves does not provide financial advice. It is an informational website that details my own approach to my own money and personal finances. If you need specific financial help or guidance, please do your own research and seek out a professional.
2 thoughts on “How do I Beat Inflation?”
Just found out about your blog watching Contra the heard series on You Tube. Added to my “Must Watch List”. This article about inflation really resonate with me. Being retire for 2 year (worst market timing move of my life!) I re-entered the work force about 4 months ago. Not the retirement I was looking for but life has this habit of throwing things at you… Hope you keep going with this column. Looks promising!
Thank you for reading André and for watching some of Contra the Heard’s YouTube content too. I’m glad this article resonated with you, I hope your current work is meaningful AND inflation adjusts over time : )