Inflation Protection

Inflation is everywhere, including here, in Canada. Last month, it peaked at 6.7%, the highest it’s been since 1991. Canadians, myself included, are feeling the pinch, particularly at the supermarket and at the pump.

That being said, the country is not in hyperinflation.

But What Exactly is Inflation? And What Causes It?

In its simplest definition it’s the loss of purchasing power over time. It means your money won’t go as far tomorrow as it does today.

Inflation happens for a variety of reasons. Currently, it’s due to supply chain issues and rebounding economies after 2 years of pandemic.

So what can you do to alleviate the impact of inflation on your money and your life? Here are a few tips.

Focus on What You Can Control

You can’t control the interest rates, the economy, the stock market, the supply chain or the government’s next move….so don’t waste your time obsessing on these.

What You Can Do With Your Savings

Disclaimer: I’m not a financial advisor. Please do your own research.

  • A portion of your savings should be invested in the stock market: historically, the stock markets have always outperformed inflation. The average TSX return over the last 50 years is at 9.6 %. The average Dow Jones return over the same period is at 9.4%.
  • Check inflation-protected bonds: In Canada, they’re called Real Return Bonds. When you buy RRBs, the principal is indexed on inflation. If inflation rises, like now, your principal is protected. However, the same happens in case of deflation. Deflation is much rarer than inflation. It’s best to keep this product in a registered account, as you’ll pay tax otherwise.
  • Don’t keep too much cash on hand: despite rising interest rates, the interest rates on savings accounts remain paltry, at best. Unless you’ll need the money in the next 12 months, you’re better off looking at the 2 previous points.

What You Can Do With Your Income

One of the best ways to protect yourself from inflation is that your income keeps up with it. Inflation and unemployment have a reverse relationship. When inflation is high, unemployment is low. It’s definitely the case right now. Some sectors even face a critical labor shortage.

It gives you a few possibilities:

  • Ask your employer for a raise
  • Look for a higher paying job
  • Ask for additional benefits that can help cover some of your expenses or save you money; the most sought-after being remote working

What You Can Do With Your Necessary Expenses

Gone are the days of fixed and variable expenses. I prefer talking about necessary and discretionary spending. Nowadays, housing, transportation, food, utilities, cell phones and internet are considered necessities. Depending on your personal situation, you may add more, such as daycare costs.

  • Shop around: price comparison is always a good bet, including on big ticket items like houses, mortgages and cars. Lots of apps can help you with this, including if it makes sense to buy gas in the US -if you live close to the border-
  • Buy at discount stores like Walmart, Costco, T & T, Loblaws
  • Buy produce at independent, local markets or at the farm
  • Radical decisions: it may make more sense financially to move to another city, or to go back to renting. It could also make sense to sell your 2nd car, if you don’t need it
  • Postponing big purchases: Can you stretch your car for another 6 months or another year? Are you financially ready and rock-solid to buy a property? If not, can you wait until you are?

What You Can Do With Your Discretionary Expenses

  • Do an honest review: make a list of all your discretionary expenses such as take-out, clothing, subscriptions, entertainment and other conveniences. Be honest on your usage of these and whether you can cut back on some of these expenses. How often do you watch Netflix, Hulu or Disney +?
  • Buy second-hand or refurbished: no shame in doing this. It’s better for both your wallet and the environment
  • Postponing some discretionary purchases: can you take your vacation in the Fall instead of July or August?

Final Word

The Bank of Canada is predicting the inflation will return to its target of 2% to 3% next year. Overall don’t panic and don’t let your emotions get the better of you. Don’t rush when making decisions.

In other words, keep calm and carry on….

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