With inflation on the rise in Canada, more and more Canadians are reconsidering how to organize their finances. Thinking strategically about how to protect your resources when the market gets tough can help you continue to build wealth while optimizing your cash flow. Whether you are new to personal finance or a seasoned investor, most people can benefit from expert financial planning in Edmonton.
Understanding the Real Impact of Inflation
Inflation is an economic inevitability. Prices will always rise over time, regardless of how well the market is doing. However, the way inflation is felt by Canadians depends on several factors, including how quickly it occurs and how it compares to the rate at which compensation packages rise. Over the past year, Canadians have had to contend with record-breaking levels of inflation.
When the rate of inflation exceeds the average increase in salaries and wages, individuals start to experience decreased buying power. Additionally, resources that do not accrue interest decrease in value with respect to the cost of goods and services.
What Causes Inflation?
There are two types of inflation: cost-push and demand-pull. Cost-push inflation occurs when production costs rise without a corresponding increase in demand. Demand-pull inflation happens when consumer demand outpaces the ability of companies to keep up with production, causing them to raise their prices.
How Can I Minimize the Impact of Inflation on My Finances?
Educating yourself on personal finance and investing is a good way to start. The market will always experience ups and downs, and you should know how to weather times of high inflation. At the same time, it is important to stay level-headed and understand that, in all likelihood, sunnier skies are on the horizon.
Analyze Your Cash Flow
Having a healthy cash flow means striking a good balance between the cash that comes in (your inflow) and the cash that goes out (your outflow). Cash flow management often becomes more important during times of high inflation. If you find that you are consistently spending more money than you make each month, you may want to look for opportunities to increase your income while reducing your monthly expenses.
Your Income
If you have any extra time on your hands, taking on a side job and/or putting in longer hours at work can boost your inflow. Since inflation levels are expected to drop eventually, you can plan to re-establish your normal work-life balance in the future. Another way to increase your income is by requesting a raise at an opportune moment, such as a performance review.
Your Budget
Over the past year, Canadian groceries have been especially susceptible to inflation. You don't necessarily need to refrain from buying things you enjoy. Simply noticing which items are available for a better price in bulk can go a long way toward keeping cash in your pocket.
Large Purchases
The goal of maintaining a healthy cash flow during times of inflation is to avoid being overwhelmed with expenses, especially if you are worried about being able to pay off your debt and keep up with your retirement contributions. Alongside budgeting, delaying large, unnecessary purchases can help you prioritize your resources as you wait for inflation rates to go down.
Pay Off Your Debts
Paying off debt can be challenging when you are dealing with inflation. However, by making sure that the money you save by budgeting goes towards your debt, you can avoid paying high-interest rates. If you owe money on multiple accounts, such as a mortgage, a car loan, and a credit card, experts recommend that you pay off the account that has the highest interest rate first. Then, you can tackle the account with the second highest rate, and so on.
If you are already paying high-interest rates, you may be able to put some of your debt on a balance transfer credit card. Balance transfer cards allow you to pay off the debt interest-free for a fixed period of six to twelve months. However, it is important to remember that the card will start charging its own interest after the introductory offer has expired.
Start Using a Cash-Back Credit Card
When combatting the effects of inflation, taking advantage of any opportunity to optimize your finances is key. Many credit cards offer between 1-2% cash back on everyday purchases and as much as 5% cash back on select categories. If you have been paying for groceries and other consumer goods with a debit card, switching to a cash-back credit card can considerably offset the impact of inflation on those purchases.
Continue to Grow Your Investments
If the current inflation levels have you stretching your paychecks, you might be thinking about putting your retirement contributions on pause. However, continuing to grow your long-term investments will help reduce the lasting impact of current economic realities on your finances. If an employer-match program is part of your compensation package, we recommend taking full advantage of it.
During times of inflation, it is wise to keep a mixture of cash resources and stock investments. While cash is readily accessible, it does not grow with the rate of inflation. With time, a wise stock investment can beat the rate of inflation in the long run. Hedging is a method that can help you offset the inherent risk of investing through diversification and/or buying put options. These tools can be used to offset adverse fluctuations in your stocks.
Speak With an Advisor About Financial Planning in Edmonton
Whether inflation is high or low at a given moment, handling your finances wisely can help you secure a high standard of living while building wealth to pass on to your loved ones. A knowledgeable financial advisor can give you valuable insights regarding:
• Cash flow management
• Long-term investments
• Short-term investments
• Estate planning
• Retirement planning
• Corporate assets
The most effective financial planning in Edmonton takes into account long-term goals as well as current market trends. If you would like more information on how to manage your finances, schedule a consultation with DeHaan Private Wealth.