Managing finances during high inflation

The article last week talked about managing our emotions before our money as a calm mind leads to better decisions. Now let us move from mindset to action.

Many of the financial adjustments needed during high inflation do not necessarily require earning more money. They require managing existing resources more deliberately.

During inflationary times, the first two pillars of EnRich Cash, Debt, Risk and Wealth or CD-RW management deserve immediate attention.

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Cash management

Inflation does not affect all expenses equally. Food prices may rise faster than transportation costs. Electricity bills may increase, while telecommunications expenses remain stable. Therefore, the first step is not to cut expenses across the board, but to understand where inflation is hurting the most.

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We will need to review our spending over the last six months by grouping expenses into two broad categories, namely: 1) “must spend” such as food, housing, transportation, utilities, education and health care; and 2) “may spend” like dining out, vacations, personal effects and vices.

We need to determine which items have increased the most, which can be substituted and which can be postponed.

Preparing more meals at home, buying generic brands, reducing food waste, taking public transport, choosing pooling instead of regular or priority delivery bookings, or simply becoming more conscious of electricity consumption can produce meaningful savings.

Budgeting should not feel like punishment. It is simply the process of aligning spending with priorities.

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Beware also of lifestyle inflation, which is one of the most dangerous forms of inflation. It comes not from the economy but from us.

Lifestyle inflation is the tendency for expenses to rise whenever income rises. Promotions, bonuses and salary increases often disappear quietly into bigger houses, more expensive restaurants, additional subscriptions and upgraded gadgets. It was once said, “Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”

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Before making any unplanned purchase, observe the 24-hour rule. Most impulses weaken with time. And if you are buying online, look at the worst comments before adding an item to your cart. What seems urgent today often appears unnecessary tomorrow.

The best defense against lifestyle inflation is intentionality. Before increasing our standard of living, we need to ask whether the additional spending will create lasting happiness or merely temporary satisfaction.

Inflation creates anxiety. Anxiety creates scarcity thinking. Scarcity thinking leads to poor decisions. People under stress often seek immediate relief. Some resort to retail therapy. Others stock up excessively or spend impulsively because they believe prices will only go higher anyway.

Debt management

We need to manage debt before it manages us. Inflation and high interest rates are an unforgiving combination. Rising prices squeeze household budgets while rising borrowing costs make debt even more expensive.

Now not all debt is bad. Housing loans and business loans can serve productive purposes. But revolving credit card balances and high-interest consumer debt can quickly become financial quicksand. Many become overwhelmed with the multitude of amounts due, due dates and creditors. The effective approach for people who do not have excess cash is what we at Personal Finance Advisers call STOMP or Stick To One Minimum Payment.

Start by identifying the minimum payment required on each debt and commit to sticking to those amounts. As individual debts are paid off through regular payments, the cash flow previously allocated to those debts becomes available. Redirect that excess cash toward accelerating the repayment of the remaining debt with the highest interest rate. And try not to incur new debt. This means sticking to your budget. If you do borrow, especially if it is for consumption, make sure you pay that loan in full at the next billing cycle.

STOMP may seem slow at first, but momentum builds over time. More importantly, it provides a clear plan and reduces the stress that often comes from juggling multiple obligations.

Focus on progress, not perfection. Many postpone taking action because they believe they need a perfect plan. They do not. A family that tracks expenses more carefully, reduces waste and gradually pays down debt is already better positioned than it was a year ago.

Small improvements, repeated consistently, compound over time.

Next week, we will discuss the other two pillars of EnRich CD-RW, which are Risk and Wealth management. We will examine why health insurance, life insurance, disability protection and even property insurance become even more important when times are uncertain. And we will also uncover the benefits of continual investing to preserve and grow wealth.

After all, staying dry during a storm requires more than an umbrella. It also requires a sturdy roof. INQ

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Send questions via “Ask a Friend, Ask Efren” free service at personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram, and Facebook. Efren Ll. Cruz is a registered financial planner and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach.