4 Ways Inflation Affects Your Money
Though many people have heard about inflation in some way, very few actually have any idea of how much it can affect their money. Knowing the basics of inflation will help you plan your spending and investments much better so that you remain financially protected from its effects. In this post, we will check out four ways inflation will affect your money.
1. Lower Purchasing Power
Higher the inflation, lower will be your purchasing power. This is because the price of goods will keep increasing in a high inflationary environment. As such, if your income remains stable, then you will only be able to buy fewer things than you used to. Inflation will also end up affecting your savings. According to best-savings-rate.co.uk, if your savings account yields a lower interest rate than the rate of inflation, you are effectively losing money. In short, an inflationary environment will force you into a situation where you can only buy fewer things while also having to watch the value of your savings erode away.
2. Increase In ARM Rates
If you have taken an Adjustable Rate Mortgage (ARM), then you will have to pay higher interest as the inflation increases. This mostly happens because the ARM is closely tied to the movements of the Treasury bill. And since the bill’s rate is directly affected by the interest rate set by the central banking authority, you will also end up with making a higher monthly payment for the ARM.
3. Currency Depreciation
Higher inflation is also often connected with depreciation in the value of a currency. And with a depreciating currency, you will have to pay more for the import of goods even though the price of the goods might remain the same. For example, if the value of your home currency in relation to another currency falls by 30%, then you will essentially have to spend 30% more for the goods that you import from the other country. And one area that currency depreciation can play havoc is in the medical field, where the prices of medicines being imported from another country can easily multiply many times over depending on the hyperinflationary pressures in your country.
During high inflationary environments, the prices of everyday commodities can soar to crazy levels. And the massive jump in prices will also make people hoard it in expectation of better profits. As such, you will have to pay a lot more for something as simple as a tube of toothpaste. In fact, this is very true in situations of hyperinflation where the value of paper money will decrease dramatically.
When faced with an inflationary situation, you need to consider adjusting your savings to protect its value from being eroded. Reassigning your savings to more government-backed treasury bills and blue-chip stocks can help in maintaining the value of your money better than just having it in the bank. Consult a reputed investment manager to get a good idea of the many ways to protect your money during inflationary conditions.