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How to Protect Your Finances During Inflation Time?

How to Protect Your Finances During Inflation Time

Prior to Russia’s invasion of the Ukraine, inflation was also rampant across the length and breadth of the UK.

However, Putin’s so-called “special military operation” has compounded such issues further, while the decision to expel Russia’s oil supplies could send energy prices soaring even higher.

As a result of this, inflation could peak above 8% this spring, causing average incomes nationwide to fall by 4% during the full financial year. But how can you protect your finances from this type of inflation? Let’s get into it.

 

 The Impact of Inflation in Savings

If you’re new to the notion of inflation, you’re probably wondering how this economic phenomenon can impact your savings and total income?

To explain this, let’s first say that you bank £100 in a savings account with a 1% interest rate. Over the course of 12 months, the value of your savings account will reach £101.

However, in instances where inflation is running at 2%, you’d need to have at least £102 to have the same buying power in the marketplace. Obviously, higher inflation rates compound this further, highlighting how they can impact on the value of the pound in your pocket.

As you can imagine, rising inflation also has a direct and negative impact on the purchasing power of your cash. Purchasing power refers to how much you can buy with a single unit of currency, in this case a single pound.

Ultimately, rampant inflation causes a currency’s purchasing power to depreciate by a fixed amount, meaning that the money you earn or hold is less valuable over time.

This is why inflation in the UK is squeezing household income and savings, and will continue to do so for the foreseeable future at least.

 

How to Protect Your Capital in the Wake of High Inflation

The question that remains, of course, is how can you safeguard your wealth and cash from increased inflation? Here are some ideas to keep in mind.

  • #1. Plan Your Finances: Whether you have large or relatively small sums of money, financial planning is crucial if you’re to curtail the impact of inflation. Make no mistake; a financial expert can evaluate your income sources and expenses, before recommending measures and investment vehicles to optimise your capital. They can also help you to trim and manage regular costs, reducing your monthly expenditure and ensuring that your money goes further.
  • #2. Change Your Buying Habits: You may find that inflation increases the cost of your weekly or monthly shop. This can be hard to deal with, so you may want to consider altering your buying habits and the items that you put in your cupboards. For example, you could switch out fresh fruits and vegetables to frozen alternatives for a while, while also transitioning from premium brands to budget ranges. These savings can make a huge difference to your purchasing power over time.
  • #3. Increase Your Income: As inflation and the cost-of-living soars, it can be hard to find value in your savings (especially if interest rates remain relatively low). Because of this, you may benefit from increasing or diversifying your income streams, whether you ask your manager for a pay rise or take on new clients as a freelancer.

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