How inflation impacts your financial health
Oftentimes throughout conversations, particularly ones that revolve around finance, you’ll encounter some terms that you’re vaguely familiar with. Whether you only recall the definition or understand the general overview, fret not! You’re never the only one with limited knowledge about the subject.
Inflation is one term that is guaranteed to pop up in a conversation. Maybe it’s a phenomenon you’re experiencing or it was the hot topic on yesterday’s late-night news. Regardless, it still is an important term to be aware of, knowing its direct impact on your financial health. So, without further ado, here’s a quick overview about inflation.
Inflation in simple terms
Misconceptions are pretty common when it comes to this term. Many tend to mistake any increase in prices for inflation. However, vendors raising cherry prices because it’s in season and there’s high demand isn’t a concrete example. Instead, inflation — reflected as a percentage — indicates a decrease in purchasing power and an increase in the price of all goods irrespective of the sector or the product.
Think haircuts, coffee, groceries, real estate etc. If yesterday you went and spent 70 JOD on groceries and there has been a 5% inflation rate today, your groceries will now cost you 73.5 JOD. You might perceive this number as insignificant, but the bigger the amount you’re spending, the worse the impact of inflation will be.
Impact on financial health
Speaking of… If you’ve got your money in a bank or not, inflation has serious repercussions on your assets and debts. To make things easy, we’ll split these effects based on these two categories:
Savings
Because inflation decreases your purchasing power and increases the prices, you’re faced with two options: spend more or buy less. If you choose the former, then you can’t save as much money as you used to, and if you choose the latter, then the money you did save has a lower value compared to before.
If you’ve decided to place your money in a savings account, then you know that your money gradually increases based on the specified annual interest rate. If the interest rate is greater than the inflation rate, then you’re in the clear. But if it’s below, then your money is, unfortunately, losing its value.
Loans
What you want to keep an eye on is your loan’s APR. The APR, or annual percentage rate, is the annual interest rate on a loan. If the interest is fixed and relatively lower compared to the inflation rate, then the money that goes into your monthly installments will not negatively impact your financial health. Why? Because the 100 JOD you’re paying today is worth less than it was yesterday. But, if the interest rate is higher than the inflation rate or if it’s variable, then inflation will increase your borrowing costs and monthly installments.
How to protect yourself from inflation
There are various ways you can protect yourself from the unfavorable effect of inflation. One thing you could do is scour for the best interest rates. If the inflation rate is 5%, get yourself a savings account with an interest above this number and take out loans with an interest below it. Consider future expectations too!
Try your hand at investing — stocks, bonds, anything that comes to mind — and speak to a financial advisor to help ease the process.
And while you’re at it, take a look at your debt balance. Pay out the debt that has an interest below the inflation rate, as for those above, figure out ways to consolidate the interest and make it fixed term instead if it isn’t already.
While inflation does have its downside, you can always flip things around if you know how. Stay on the lookout for the first sign of inflation and address it as soon as possible to cushion the fall and keep yourself financially healthy!
