Beating the Race Against Inflation

04 December 2023

While Singapore has traditionally experienced modest inflation, maintaining an average of 1.8 percent over forty years (1981–2021), 2022 stood as an exception. According to the Monetary Authority of Singapore, there was a significant climb in consumer prices, rising 6.1 percent from the prior year, marking this as the steepest escalation since 2008. This prompts a critical inquiry: How are you or people around you coping with inflation and the rising cost of living? The answer requires a strategic approach to financial management and an understanding of how to beat inflation.

Identifying inflation challenges: A closer look

Inflation, by its nature, presents several distinct challenges that consumers and even entire economies must navigate. Understanding these challenges is crucial in developing strategies to maintain financial stability and wellness.

Rise in expenses

Inflation represents the diminishing purchasing power of money over a period, characterised essentially by a broad increase in the average prices of goods and services. Although individual item costs might vary, inflation measures the overall upward price trajectory for essentials like food, transportation, energy, apparel, housing, and leisure, among others, across the economy.

The immediate consequence for consumers is an unavoidable increase in daily and monthly expenses. This can contribute to the rising cost of living in Singapore, significantly reducing the disposable income available for savings or discretionary spending.

Expenditure growth supasses income increase

In an inflationary period, the rate at which expenses grow often surpasses the rate of income increase. Salaries, particularly in certain sectors, may remain stagnant or not increase proportionally to rising costs, resulting in what's essentially a pay cut adjusted for inflation. This disparity between income and expenditure growth means reducing current living standards and diminishing capacity for savings and investment for future financial goals, like homeownership, education, or retirement in Singapore.

Maintaining prudent discretionary spending

For individuals and families, managing discretionary spending — or non-essential purchases — becomes a complex task in the face of rising expenses. The need for stringent budgeting becomes paramount as prices rise. This often leads to tough decisions, cutting back on leisure, entertainment, vacations, and dining out, which can affect quality of life and well-being. Furthermore, inflation can lead to "shrinkflation" where products' sizes or qualities are reduced. At the same time, prices remain the same, making it harder to maintain the same standard of living without increasing spending.

Implications of inflation on financial wellness

But what does all this mean for your financial wellness? Financial wellness is the ability to have a healthy financial life. It means your debts are manageable, you're saving for the future, and your financial situation isn't causing you stress. It's about the sense of security you feel knowing that you can afford to pay your bills, make your monthly loan payments, and meet your other financial obligations.

During inflationary times, achieving this can feel like an uphill battle as regular expenses balloon and the future becomes unpredictable.

Fortifying financial resilience in the face of inflation

With proactive strategies, however, you can fortify your financial wellness against the challenges of inflation. Here’s how:

1. Regular expense review

Start by categorising your expenses into essentials and non-essentials. Essentials are the expenditures you can't avoid — housing, groceries, utilities, and healthcare. Non-essentials are areas where you can cut back. The goal is to find a balance where you can live comfortably but also trim back where necessary.

Inflation often means that prices creep up stealthily. Regular tracking of your spending can help to catch these changes, preventing them from sabotaging your budget. Tools like budgeting apps and expense trackers are invaluable in this respect, providing real-time updates and visual representations of your spending. Some apps even offer alerts when you approach the limits in your budget categories.

Additionally, in periods of high inflation, historical budget data might become irrelevant. What you allocated for groceries or fuel last year may be insufficient now. It's essential to be flexible with your budget categories, adjusting them as needed to accommodate these rising costs in Singapore. This might mean reallocating funds from non-essential areas to ensure you can cover increased costs in your essential categories.

Furthermore, set realistic savings goals and continuously review them. Inflation might impact the purchasing power of your savings, so understand how much you need to put aside to maintain your current living standards in the future. Consider consulting with a financial advisor to set these targets and discuss investment options to offset inflation.

2. Strategic shopping

To beat inflation, adopting a smarter, more strategic approach to shopping is also crucial. It's not just about cutting costs, but about maximising the value you get for every dollar spent.

Price comparison should become second nature. With numerous online platforms and apps at your disposal, you can compare prices across different retailers in real-time. These digital tools are invaluable in helping you identify where you can get the best value for your money, especially for regular purchases like groceries, clothing, or electronics. Be vigilant about changes in prices as some retailers may offer discounts or loyalty benefits that others don't.

But wise shopping isn't just about chasing the lowest price tag. It is essential to strike a balance between cost and quality. In some cases, investing in a high-quality product that may cost more upfront can be more economical over time. These products often last longer and perform better, reducing the need for frequent replacements. For example, a high-quality appliance with energy-saving features may have a higher purchase price but will save you money on utility bills in the long run.

3. Safeguarding purchasing power

Inflation's insidious nature lies in its ability to silently diminish the value of your hard-earned money over time. The key to effectively combating this is to preserve — and ideally, grow — your purchasing power through strategic financial moves. This involves not just saving money but growing it at a rate that counters inflation.

Savings accounts are traditionally viewed as safe havens for your money. However, in times of inflation, the interest earned on these accounts can be less than the inflation rate, meaning your money actually loses value in real terms. To counteract this, seek out high-yield savings accounts that offer interest rates higher than or at least closer to the prevailing inflation rate. These accounts can provide the security of a traditional savings account with a better return on your investment.

4. Investment and long-term financial planning

Investing is another potent tool in the battle against inflation in Singapore. The key lies in selecting investment vehicles that historically offer returns that outpace inflation in the medium to long term. Diversification across asset classes, including stocks, bonds, real estate, or Exchange-Traded Funds (ETFs), can hedge against inflation risks. Take, for example, equity investments in sectors poised to thrive amidst inflation, or real estate investments that generate steady income; these strategies can foster growth and create revenue streams that keeps pace with or exceeds inflation.

Moreover, considering the best investment in Singapore involves recognising opportunities that align with your financial goals, risk tolerance, and investment horizon. Adopting a long-term perspective is crucial, as market fluctuations are less impactful over an extended period. For those prioritising financial wellness, reaching out to StashAway is a tactical decision in refining your investment strategies amidst inflation and other unexpected challenges.

If you are uncertain about how much liquid cash you should have or comparing long-term versus short-term investments, we have further insights to guide your decisions. With the right tools, advice, and strategies, you can turn the tide on inflation and ensure it does not erode your hard-earned wealth.

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