How does Inflation affect your Financial Planning

Inflation is indeed a hot topic currently. In the U.S. inflation has jumped to 8.6% in May, the steepest increase since year 1981. Inflation in UK even hit 9.1% in the month of May, at a 40 year high.  Singapore consumer price index (CPI), on the other hand, rose by 5.4 per cent year on year in April, while Malaysia recorded an inflation of 2.3% in the month of April. However, according to the Department of Statistics Malaysia, food inflation in April 2022 increased 4.1% from a year ago, with 89.1% of items in the food and beverage group recording price increases.

No thanks to supply chain disruption, labor shortage and war. Change in climate contributes to further price increase.

When we dig further on individual items, the impact on price increase are even more stunning. For example, per kilo of red chilies normally is RM7 to RM8 but it went up to RM21 per kilo, which is 300% increase. A bottle of cooking oil of RM20 went up to RM30. The amount of money used to stock up monthly essential goods had increase tremendously. With the same amount of money, you only can get a fraction of it.

Besides increased in the cost of living, how does inflation impact our financial plan ? As stated earlier, as the cost of living increased, with the salary growth rate way lower than cost of living, our purchasing power decreases.

Those taking up housing loan with variable interest rates will feel the impact as interest rates continue to rise. Monthly loan instalment will increased. This will increased your monthly cash outflow versus cash inflow.

Even without the increased in inflation, medical cost itself tend to increase 10% annually. With the increase in inflation, the cost of purchasing medication, consultation and operation will increased as well. Hence, the cost of medication becomes higher generally. Based on the Rule 72, every 7.2 years the medical cost will be doubled. Is your current medical plan manage to cope with the rising medical cost?

How does it affect your investment portfolio? Value in saving account depreciate. This means you have less purchasing power. Stock investment seeing short term volatility and some of the stocks you hold may report lesser earnings due to lower demand or labor shortage and hence reduce the stock price and dividend yield. Stay calm and stick to your investment goal. Review it annually and you may practice dollar cost averaging if you want.

Do I have to review my retirement plan? Definitely. With the current inflation, if you want to maintain your lifestyle at retirement, you will need a higher amount of income at retirement or extend your retirement age.

How about children education planning? Education fees is fees which do not reduce in value and in fact grow higher and higher yearly. A good education ensure our child to enter into the working world with a better foundation. Inflation may boost education fees higher in a more faster pace. For parents who wish to send their child to study in overseas, you may want to take into consideration the changes in the exchange rates when planning for the education fees.

How does it affect my business as a business owner? Inflation cause the price of raw materials to increase, resulting to higher cost to purchase these raw materials, hence it may affect your net profit. Inflation also cause interest rate to increase, resulting to increase of monthly loan instalment and hence increased in business expenses. Challenges also occur whether you can passed down the cost to the purchaser, still maintaining the same amount of clientele or secure new project.

What can we do to mitigate the above challenges?

It is time to review your financial plan. Try to aim at least 6 months worth of emergency expenses in case of a prolong downturn. Revise your current budget to see if there’s any places where you can reduce or cut back. Additionally, check your adjusted rate debt – credit card, mortgages and business loan – and see if you can reduce the balances or refinance it.

If you are still in doubt and need a professional to help you on the above concerns, feel free to set up an appointment with me.

Bye for now and stay safe.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: