How to better manage your finances during times of runaway inflation
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If you’ve gone shopping for pretty much anything in the past several months, you’ve probably noticed that your budget isn’t stretching as far as it used to.
It’s all thanks to what economists are calling a ‘pandemic-fueled inflation’.
While inflation is a natural market occurrence that generally happens over time, shortages of goods and workers throughout the pandemic have pushed inflation to its highest levels in decades. The ripple effect of which has been causing exorbitant price surges in everything from groceries, gas, and utilities—to a wide range of services. And consumers from coast-to-coast have been feeling the financial pinch.
According to a recent survey, the increased cost of living (due to inflation) is a major source of financial stress for roughly two-thirds of the country.
Here is the full breakdown of financial stressors currently affecting Canadians:
- Increased cost of living due to inflation (67%)
- Difficulty saving for retirement (30%)
- Inability to absorb unforeseen expenses (25%)
- Unpredictability of investments (25%)
- Not being able to save as much as they could pre-pandemic (22%)
- High-interest consumer debt (17%)
Since salaries aren’t exactly rising at the same rate as inflation, you’ll most likely have to identify key spending areas where you can either save or cut back altogether.
“One of the best ways to do this is by re-evaluating existing debt, starting with your mortgage,” says Educators Agent-Regional Director Nick Rao. “Because of the current climate, I’ve been talking to quite a few clients about extending their mortgage amortization periods. While most people would prefer paying off their mortgage early, and for good reason, these inflated financial times could call for a more measured approach by easing up on the size of those monthly mortgage payments (to free up cash flow).”
That’s where extending the amortization of your mortgage has the potential to free up hundreds of dollars per month and thousands of dollars a year:
|Ontario Average Mortgage Balance||Amortization in Years||Monthly Payment||Difference Monthly||Difference 12 months|
|GTA Average Mortgage Balance|
Above chart for illustration purposes only and assumes a fixed interest rate of 2.74% over the duration.
While adding several years to your mortgage might not be the ideal scenario, it could buy you the time you need until your financial situation improves.
“Then, when your monthly cash flow gets more manageable, you can start increasing your mortgage payments and reduce your amortization period once again,” continues Nick. “That’s where having lump sum (payment) options can provide you with the flexibility to adapt according to your financial challenges, needs, or goals. In fact, there are all kinds of mortgage options available to you. Knowing what they are and how to utilize them can provide you with the financial breathing room you need, especially during challenging times.”
In addition to your mortgage, look for ways to cut costs on other debt obligations.
“High-interest loans and credit cards can also cause a serious drain on a person’s monthly finances,” explains Nick. “During periods of high inflation, that debt drain can happen all the more quickly. But sometimes you’ve got to fight debt with debt to prevent your finances from spiraling out of control. Taking out a debt consolidation loan, for example, could be the debt solution you need to eliminate multiple balances and interest rates in favour of making just one monthly payment—usually at a much lower rate of interest.”
A debt consolidation loan offers a variety of immediate benefits:
- Simplifies your finances (multiple loans/payments become one)
- Saves you money overall in interest payments
- Provides the ability to repay your debt sooner
- Gives you the potential to improve your credit score (i.e. with only one loan payment to keep track of, you’ll be less likely to inadvertently miss/be late making a payment)
Credit tip: Avoid credit cards with high annual fees or high interest rates and consider choosing cards that offer rewards in order to maximize your purchasing power—then use those points for the times of the year when you need it most, such as the summer months.
Beyond being debt-conscious, you’ll also want to crack down on your budget.
“Budgets are one of those things that everyone knows about, but only a select few ever seem to follow,” says Educators Senior Financial Advisor Mariam Khan. “And I totally get it, like personal fitness goals, budgets take a whole lot of work and discipline. But here’s the thing, if you can commit to putting in the effort, you’ll actually begin to see the results.”
As for how you should go about building an inflation-oriented budget, Mariam has a few suggestions.
“Consider focusing your budget on areas where inflation might have the biggest impact on your monthly spending,” says Mariam. “Things such as food, utilities, transportation, and gas. Then think about ways you can stretch your budget further, such as shopping at less expensive stores or buying lesser-known brands. It’s also a good idea to identify the types of expenses you can cut or reduce, without significantly affecting your quality of life—such as deciding to cook more often instead of going out or ordering in.”
Want to get ahead of inflation? Here’s how to build a budget that works.
If you need a little help when it comes to better managing your finances during times of runaway inflation (or anytime for that matter), call on us for a little educator-specific advice.
Whether you’re looking to get a better handle on debt, save for future goals, or maximize your pension in retirement—Educators Financial Group can help you do it all. Plus our ability to see your finances through the lens of an education member means you’ll always be getting advice and solutions that genuinely understand where you are (I.e. pay grid, pension income) and where you want to go.
Don’t let inflation deflate your financial goals: we can work with you to come up with a solution.
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