Given the impact of the COVID-19 pandemic on the global economy, it is expected that inflation will also be affected. Read this article to find out the best ways to get ready for inflation in 2021.
Though 2021 may have started with a disastrous flood - affecting thousands of Malaysians and their families in several states across Malaysia - the country can expect to at least escape deflation in 2021 and see increased price pressures in the following months, according to experts from Kenanga Research.
According to the research house's forecast, inflation is expected to turnaround but remain relatively benign at 1.7% this year, with the expectation of economic growth recovery.
“The continued pandemic-related restrictions will likely sustain deflationary pressure in the coming months... the recovery in global crude oil prices is also expected to contribute to the uptrend. With the expectation of economic growth recovery, we forecast the rate of inflation to turnaround but remain relatively benign at 1.7% in 2021,” they said in a statement. In 2019, Malaysia’s headline inflation was registered at 0.7%.
Additionally, with the onset of positive vaccine sentiment and improving economic conditions, Kenanga Research said, it sees a higher probability that the Bank Negara Malaysia (BNM) will keep the benchmark overnight policy rate (OPR) unchanged at 1.75% at the next Monetary Policy Committee meeting on January 20, 2021. “Nevertheless, risks remain tilted to the downside due to the continued surge in COVID-19 cases locally.”
Another research house CSG-CIMB Research, concurred with the findings by Kenanga Research, adding further that policymakers at BNM are likely to remain cautious due to the uneven economic recovery, retaining the OPR at 1.75% throughout 2021. The research house forecasts headline inflation of 1.6% in 2021.
What is inflation?
Any financial advisor will tell you to always invest above the inflation rate. But what does that mean?
According to the International Monetary Fund (IMF), inflation is the rate of increase in prices over a given period of time. It is typically a broad measure of prices such as the increase in the cost of living in a country but is also used to calculate more specific goods such as food, or for services, such as a haircut.
In more layman terms, it is often described this way: as time goes on and inflation increases, a person’s buying power becomes less with the same amount of money.
Say a bowl of Nasi Lemak costs you RM5 in 2005; that same piece of Nasi Lemak - the exact same serving and features will cost you RM10 in 2020 - or double the original price, despite offering the same value.
Is inflation problematic?
Yes! It’s the bane of every businessman and salary earner worldwide, the root cause of rising costs and other financial woes.
While inflation is a subject that remains highly misunderstood among laypeople, it can have a very real effect on how you cope with your day-to-day expenses. Without knowing the effects of inflation, a person may not be able to better strategise or manage their finances for the long-term, and end up losing more than they should on the short-term.
Is it possible to stop inflation? Maybe! It’s a concept that is still under immense research and debate, often popping up in financial and economical discourse, but there is still no concrete answer to it.
So though we are unable to stop inflation, that doesn’t make you powerless against its effects. Understand how it affects your purchasing power and you can start building effective strategies to protect your finances.
Here are five ways to financially prepare for rising prices
Here are just a few ways you can prepare yourself for the barrage of higher prices brought about by inflation.
1. Learn the art of investing
Investments are among the best ways to insulate your life savings from the effects of inflation.
By taking the plunge and putting your money in a diverse portfolio of stocks and bonds, you can grow your personal worth more quickly than if your money was idling in your bank account.
Start paying more attention to financial news and trends to uncover where smart investments lie.
The earlier you start investing, the better because you have a longer time horizon (aka: duration to invest), and because the returns from investing generally magnify over time. There’s a saying that time is an investor’s best friend, and it really is.
Of course, we are not talking about beating or timing the market, but growing together with it. With enough time, resources and skills, logically, your wealth would grow exponentially. If you are not sure where to start investing, check out this piece we did on dummy-proof ways to start investing your money.
Related: 5 Simple Steps to Start Investing in The Stock Market
It wouldn’t help to check our website if you are on the lookout for personal loans.
2. Look for fixed rates
When it comes to inflation, time tends to be your biggest enemy. As prices grow across the board, so too do the regular dues and fees that come with most transactions.
A fixed interest rate prevents your regular payments from ballooning along with inflation by keeping your interest proportional to your actual savings. Whether it’s on a personal loan, a savings account, or a future investment, you must find a deal that guarantees fixed rates for its duration.
If you are on the lookout for a personal loan, we recommend checking out personal loans on our website for a more comprehensive look at the different options available in the market.
Related: Balance Transfers Vs Debt Consolidation Loan: Which Is Better In Helping You Clear Your Debt?
Buying a property is a huge financial commitment, so make sure you are financially-ready before taking up a house loan.
3. Buy a home
And by “home” we mean an actual house built on a plot of land in your name. Owning a property means that you will have a concrete asset you can pass down to your descendants or use for a different purpose later down the line.
If you can’t afford to buy a property with cash (and typically most of us won’t be able to), you can shop around for a home loan at terms that agree with your current budget.
Besides gold and Bitcoin, real estate investments are often seen as inflation hedge investments as well because they are assets that are expected to increase or maintain value over a period of time. Real estate is a great tool to fight inflation because of its appreciating value, possibility to earn increasing income in the form of rents and its depreciating debt.
Related: Should You Buy A New Property After COVID-19? Here’s What The Experts Say
4. Keep your options open
As the motto of the Boy Scouts goes, be prepared. Always have a Plan B (or several) in the wings when things take a turn for the worse.
Budget your income wisely and build an emergency fund. Look into inflation-proof assets like real estate, commodities, and income sources with steady cash flow. Maintain a clean lifestyle and find a good health insurance plan to counter the rising costs of medical care.
If you can’t beat inflation, at least you are prepared to face it.
Related: Money Management: 3 Ways to Control Your Finances
5. Live thriftily
As inflation often has an immediate effect on prices, one no-brainer solution you can try is minimising your spending. Keep frivolous spending to a minimum.
Save on gas by carpooling, taking public transport, or even working from home. Be more strategic about how you use your credit card, keeping an eye out for low APRs, exclusive discounts, and helpful rewards programs.
Related: Use These 7 Cash Tricks to Grow Your Savings
Verdict: You can’t prevent inflation (yet) but you can improve how you manage it
While some of these tips are simple enough for you to incorporate into your regular spending habits, others may require greater involvement in the long term.
The good news is that financial literacy is the gift that keeps on giving, and can better prepare consumers for any future upheavals in the financial market. Get a head start on your finances today, and save yourself from a world of trouble tomorrow.
For more useful financial tips, keep exploring our blog for all kinds of timely money-saving advice.
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