Inflation is a form of monetary depreciation in which the general price level of goods and services rises. The impact of inflation affects everyone, and it is important to keep this in mind when making financial decisions. Inflation is a very complex phenomenon, and its effects can be detected in many different areas. It influences most commercial contracts and the general cost of living.
Many buyers and sellers consider inflation to be the biggest threat to their wallets. Indeed, inflation can lower your purchasing power, especially if you are a fixed-income earner. To beat inflation, you need to plan for it. In this article, we will help you find specific money-saving tips that will help you fight against inflation.
What is inflation?
Inflation is the rate at which the general level of prices for goods and services is rising. Inflation is often referred to as a monetary phenomenon in which a rise in the supply of money relative to demand tends to raise prices.
There are two main ways to measure inflation: the consumer price index (CPI) and the GDP deflator. When talking about inflation, we will refer to changes in the CPI. The consumer price index tracks the overall change in the price of a specific basket of goods over time.
The CPI is calculated by comparing the cost of a basket of goods and services each year to the cost of that same basket in a base year. The goods used to calculate CPI are considered the most popularly purchased goods. To calculate CPI, follow the formula below.
Annual CPI=Value of Basket in Prior Year/Value of Basket in Current Year×100
The most common basket of goods and services includes the following:
- Food and beverages
- Education and communication
To calculate inflation, we take the difference between these two amounts, which is then divided by the cost of that basket in the base year. If the CPI went up by 5% between two years, it means that the cost of a basket of goods and services rose by 5%.
Inflation Rate=Prior CPI-New CPI/Prior CPI×100.
Now that you have a basic understanding of inflation, let us look at how you can deal with the impact of inflation.
How does inflation affect you?
Inflation is a major factor behind many of the most important financial decisions that we make. Inflation affects our savings, investments, and spending decisions. It can also impact the price of a home or car you buy, as well as how much money you need to save for retirement.
The following sections will discuss the various effects that inflation has on your personal finances:
Inflation will have a big impact on your investments. The reason is that investment returns are often measured in terms of “real” returns, meaning they’re adjusted for inflation. So, if an investment earns 5% per year but inflation is 2% over the same period, the real return is only 3%.
As an investor, this means that your actual purchasing power could decline over time. For example, if you have Ksh100 today but inflation runs at 2%, then next year you’ll only have Ksh98 left after all prices rise by 2%. In other words, your purchasing power has decreased by 2%.
When inflation is high, it reduces the purchasing power of your savings account. You may find that you can’t buy as much with your savings as you used to be able to or that your savings account doesn’t grow as quickly as it once did.
It’s important to keep this effect in mind when choosing where to place your savings. For example, if you plan to save for retirement but don’t want your money tied up for long periods, consider short-term investments such as certificates of deposit (CDs). In Kenya, these investments are KDIC (Kenya Deposit Insurance Corporation) insured and usually come with some type of interest rate guarantee that will protect you from loss due to inflation or market fluctuations).
Inflation’s effect on the purchasing power of money. Inflation reduces the purchasing power of money. For example, if you have Ksh100 today and inflation is 2%, you will have Ksh98.20 in one year. The purchasing power of your money has decreased by 2%.
Interest rates (on loans)
There is an inverse relationship between inflation and interest rates. The lower the interest rate, the higher the inflation. When rates are high, inflation tends to go down. When interest rates are low, people tend to borrow, which increases demand and affects supply. This increases the price of goods.
People avoid borrowing and instead save when interest rates are high. This means they will spend less on goods, and as a result, the prices will rise slowly. When prices rise, Kenya’s central bank will increase base lending.
In November 2022, CBK increased the base lending rate by 0.50 bps to tame inflation.
Measures you should take to limit the impact of inflation
Inflation is a problem that affects us all and can have a huge impact on our lives, whether we are aware of it or not. This is because inflation makes it harder for us to afford things we need, like food and housing.
1. Evaluate your finances
It’s important to know the impact of inflation on your personal finances. If you purchase a lot of products, then the impact will be greater as compared to someone who doesn’t consume a lot. You can calculate your personal inflation by subtracting the amount you spent a year ago from your current spending. Divide the answer by your spending from a year ago.
For example, if last year your total expenses were Ksh 25,000 and this year they are Ksh 35,000, your personal inflation will be as follows:
35,000-25,000/25,000*100= 40%. Your inflation rate will be 40%. This gives you an idea of why you feel like your money is disappearing.
It’s important to know how much money comes in and goes out. This will help you identify areas where you can cut expenses and stretch your income further. Look at your debts and see where you can save money on interest.
If you have a credit card, it’s time to set the spending limit. You can do so by setting limits and receiving notifications once you reach the limit. Make sure your credit card bill is paid every month to avoid attracting interest.
To limit the impact of inflation, you need to have a strategic plan when handling money. Create a budget and follow it religiously. By following the budget, you will be able to avoid overspending and impulse buying.
3. Avoid unnecessary fees
Inflation is reducing your purchasing power. Cut unnecessary fees from financial products. While it’s impossible to avoid all fees from financial products, make the necessary adjustments and cut the fees.
If you have a credit card, pay your bill on time every month to avoid late fees, overdraft fees, and monthly interest.
The more cash flow you have, the better it is for you. You will be able to afford your expenses and build your wealth portfolio even in times of inflation. Consider having a side hustle or passive income to supplement your income.
5. Start investing
Research and invest in investments that will give you a higher return than the inflation rate. Most savings accounts earn an interest rate that is below the inflation rate. It’s therefore important to start investing your money to avoid eroding its value.
Look for investments that will give you a higher rate of return than the inflation rate.
Ways to Minimize the Impact of inflation
While inflation has a negative impact on your financial situation, there are steps you can take to avoid it.
1.Invest in asset-backed investments.
Asset-backed investments provide a good hedge against inflation. Investments such as property give you a viable option to beat inflation. Here is why you should consider investing in property to combat inflation.
- Purchasing a property to rent will give you an income that keeps up with inflation.
- Increasing property prices that outstrip the pace of inflation
- Increasing property prices lowers the loan-to-value ratio of your property. This will lower the impact of inflation and high mortgage rates.
2.Explore the bond market.
Bonds are low-risk investments that will safeguard your investment in times of inflation. With bonds offering a return of up to 14%, they offer a higher return than the inflation rate. Explore bonds that are tied to the CPI as their interest rate is adjusted every six months.
You need to stay informed, as sudden changes in inflation will affect your finances. It’s critical to stay up to date on inflation trends so you can adjust your investment strategy accordingly.
In addition, by understanding the effect of inflation, you can select the right investment. You will be able to monitor the rate of return on your investment and ensure that inflation does not eat away at your gains.
4.Invest in high-yield instruments.
Invest in high-yield stocks or exchange-traded funds from companies that can withstand and outpace inflation. You can also consider investing in precious metals such as gold and silver. You must be aware of the risk involved before you invest.
REITs are income-producing real estate investments. The price of property and rent tend to rise during inflation. REITs are made up of a pool of real estate investments that give investors dividends. When choosing REITS, make sure you select one with a low expense ratio.
10 Real Estate Investments with a High Return on Investment (ROI)
1.Mi Vida Homes in Garden City
Just 15 minutes from Nairobi’s CBD, Garden City Residences offers unsurpassed accommodation in this location . The the Mall, Business Park and other Garden City facilities form an exciting focal point for this busy and rapidly expanding area. With Mi Vida you can be sure of quality and convenience at the with the world-class retail mall, Grade-A offices, landscaped central park and dedicated children’s play areas, and a selection of family entertainment on the doorstep.
If you are looking for a yield, investment-grade residential units, providing superior accommodation off Thika super highway, with a proven “Buy to Let” market already established, Garden City boasts a range of contemporary residential units including 2 & 3 bedroom apartments and duplexes and 4 bedroom townhouses, both for sale and rent.
Take advantage of the this strategic location, with multiple corporates already leasing units including EABL, PZ Cussons East Africa Ltd, Chandaria Industries and ICIPE, and a number of businesses looking to open
their doors soon.
With an expected yield from 8 to 9% you can be sure your investment is earning a good return in comparison with other investment in similar areas. Below is the pricing and the returns.
2. Project 237 by Mi Vida
If you are looking for a way to gain access to the lucrative world of real estate, Project 237 gives you the chance. Project 237 is nestled within Garden City and offers you the opportunity to own part of Garden City. Located within the proximity of the most preferred employers, Project 237 promises you full-time occupancy.
Project 237 by Mi Vida is powered by two real estate giants: Actis and Shapoorji Pallonji Real Estate, who have over 220 years of experience building iconic and award-winning properties. Together, the two corporations have built over 200 million square meters of real estate and large-scale infrastructure. You can be sure you will get quality units at an affordable price.
Why Project 237?
- Instalment Payment
You can pay for the project in installments. The developer is giving you an opportunity to own a high-value unit by paying at an affordable pace. Here is a breakdown of the payments
2.High return of up to 20% over the medium term
3.An attractive entry price to world class units.
For more information on how to start paying for your unit sign up below;
Inflation can be caused by several different things, including rising commodity prices and a tight money supply. While there’s no way to escape the economic effects of inflation, you can reduce its impact on your personal finances. By keeping a close watch on prices and learning how to reduce your reliance on certain products, you can keep the damage of inflation to a minimum. Budget carefully, invest wisely, hedge against inflation, and protect yourself from its worst effects.
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