“Inflation takes from the ignorant and gives to the well informed”
In its broadest sense, money is anything generally accepted in exchange for goods and services. In other words, money is defined by the functions it serves in the economy.
Even when you have money available to purchase goods and services, as in mechanical example, money’s ability to serve its functions has its limitations. High rates of inflation, for example, make money less useful in many ways. Inflation occurs when prices rise across the economy, decreasing the purchasing power of your money.
For example, in 1990, a movie ticket cost on average RM5. Today, the average price of a movie ticket has increased to RM20.00. If you saved RM20 from 1990, it would buy fewer movie tickets today than it would have nearly four tickets, three decades ago.
Inflation is a feature of economic recovery. In Malaysia and all over the world right now, it’s being driven by a few overlapping factors resulting from the Russia-Ukraine war, the Covid-19 pandemic: low interest rates set by the Central Bank’s, several rounds of direct government stimulus to both consumers and businesses and pent-up consumer demand that is being unleashed as the economic activities reopen.
All of this has led to demand outpacing supply, causing shortages and price spikes in categories of goods including semiconductor chips, used cars and housing, flight tickets and others.
Many economists and financial experts say that the current rate of inflation is temporary and expected, and today’s increase is nothing compared with the 1970’s high inflation. Let’s discuss, on the impact of a higher inflation, its cost to us and ways for us to address it.
Personal financial strategy
Change the word budgeting to financial strategy, many have negative or demotivating behavioural when it comes to budgeting. Every step-in budgeting is all about your financial strategy.
You need to know where your money is going if you want to have control on your finances, whether you are living paycheck to paycheck or making six figures a year.
Budgeting, contrary to popular belief, is not only about limiting your spending and eliminating all of the joys in your life, rather it’s all about knowing how much cash you have, where it goes, and then deciding how to effectively spend that money.
Having a personal financial strategy is always the best way to keep expenses under control. In recent years, inflation has caused many Malaysians to take up the practice. Only with personal financial strategy can you find leakages, increase your savings, reduce your liabilities and build your wealth.
Keep investing
Prices are rising, squeezing our budgets more than we have seen in the last 40 years. It also means that for many investors, it may be more important than ever to continue to put their long-term savings into investment, the least return equal to inflation rate.
If you invest consistently without putting too much money at a single point in time and ensure that it stays invested for the long term across market cycles, your return is likely to be close to the long-term average.
This can be achieved using S&P500 and Exchange Traded Fund (ETF). As prices soar, it can be tempting to seek out investments that will keep pace with inflation. Before you consider where to invest, I recommend setting aside enough reserve cash to overcome any immediate financial challenges.
Simple as it may sound, a survey by Bank Negara shows less than half of Malaysian have enough in savings to cover only one month emergency expense.
Use ‘debt avalanche’
Many put paying off loans at the bottom of their financial priority list, doing it with whatever money they have left over at the end of the month.
First things first, you’ll need to find the following information on all of your debt: the amount of loan balance and interest rate.
Prioritise your debt by interest rate, this is known as the “debt avalanche” method, and mathematically, it’s the one that will save you the most money over the course of your debt repayment journey.
What you need to do is order your debts from the highest interest rate to the lowest interest rate.
Take control of your life
When we don’t set financial goals, we will spend our whole life running up and down and not achieving anything. If we don’t understand who we are and what we want, our surrounding environment will influence us to be the way it wants us to be.
Many people today are moving in a robotic life. Even though they work hard, they don’t feel like they are getting what they want. That’s because they don’t have a direction of where they want to go and what they want to achieve.
When you start to set financial goals and think about what you want, you break out of the auto-pilot mode and start living a life of your conscious creation. Instead of letting others tell you what to do, you proactively take charge and think about what you want for yourself.
In a complex and uncertain world, understanding your financial goals, which are unique to you, defining them sharply, and sticking to them are vital. It is equally valuable to understand your own risk appetite, which is tested in volatile markets.
Finding the right match between your needs and the existing offerings is critical to a successful wealth building journey and a good independent advisor or licensed financial planner can help guide you towards this.
Gunaseelan Kannan, CFP, a Financial Adviser Representative by Bank Negara Malaysia and a Licensed Financial Planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his Doctorate research on entrepreneurship, financial planning and financial technology. He also lectures on accounting, finance and business fields in Asia Pacific University of Technology and Innovation (APU). He is the Winner of Malaysian Financial Planner of the Year 2020, from Financial Planning Association of Malaysia. He can be reached at [email protected].