How to deal with inflation – best ways to reduce financial stress

Peter McGahan looks at how you can deal with inflation by taking stock of your monthly expenditure.
How to deal with inflation
How to deal with inflation: Consumer finances taken a huge hit through the cost of living crisis

We have covered inflation at length and it’s a subject set to run for a while, especially as the world’s obvious and reported Geo politics have their impact, let alone the big stuff that isn’t.

What are the impacts and what can be done to deal with inflation?

Consider the spending habits of society to guide what the potential issues might be.

We all have a disposable income. (It could be negative by the way). That’s the income left after necessary bills are paid. Others have become accustomed to disposable income defined by what they have after everything has been paid out, but we will go with the former for this column.

I’ve met plenty of people who just spend based on what they have, which is different to the net disposable income referred to above.

Why disposable income decreased

In times when governments were handing out furlough payments to many who had little to no expenses, net spendable cash soared. There was nowhere really to spend and when everything opened up, there was no longer a need to budget, instead, the ‘feel good’ was the priority.

The numbers can, of course, be misleading. In quarter two of 2020, real disposable income actually decreased by 2.3 per cent which was the largest fall on record. Compare this to the household savings ratio in 2020. This is defined as ‘household savings versus household disposable income’. If the average disposable income has fallen as above you might expect the savings to do the same.

In reality it did the exact opposite and soared to the highest level since records began to 29.1 per cent. This occurs because the highest earners have much larger disposable incomes and when they aren’t out spending, the savings roll up at a record rate. For the record, that savings ratio is at 6.8 per cent today and has been dropping since Q1 2021.

As you know our societal ladder cannot survive like that. A ladder where the first two to three rungs are broken, is a recipe for an unhealthy and unhappy society. I wouldn’t like to be on that top wobbly rung.

How to deal with inflation

When things are tight, we focus our minds on what is really needed, rather than wanted. We all have our general fixed costs, but those with higher incomes naturally have that bigger gap between total earnings and what is spent. For example, those within the top 10 per cent of earnings spent a colossal 500 per cent more on personal care products than those in the lowest 10 per cent of earnings.

The UK was reported as having one of the higher costs of living in the world, a number that was also just a fraction under the average minimum wage. France had the highest disposable income in the world and their minimum wage is third highest in the world. The USA had the lowest disposable income in the world, a record to be so proud of given it is classed as the land of the free, and often as the richest country in the world.

So it really is time to tighten up for those worried and for us all to be supportive of those around you who are struggling.

My mum always said to ‘take care of the pennies and the pounds take care of themselves’. That does work.

Scour your bank account. Decide if it’s necessary spending or not, and put a pause on those that aren’t. This inflation squeeze will be temporary.

The cost of keeping up with the Joneses

Avoid ‘Farcebook’ and other such ‘social’ media outlets that make you feel you aren’t good enough, by not having the latest ‘things’ by comparing you to others. Look at each and every bill and see if it can be reduced. If its life insurance or any insurances, go to your Independent Financial Adviser or broker and ask them to compare to the market. If you have pensions, you should be able to take a holiday from payments. Other savings accounts also have that flexibility.

By scanning your monthly expenditure and analysing how each payment can be cut to the minimum, you will give yourself the best chance to reduce your financial stress. Most importantly, if you are in any worries, talk to the lenders, the suppliers or whoever you owe and communicate. They are always willing to assist.

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For more stories like How to deal with inflation, Peter McGahan writes a plain-speaking weekly column for over 50s savers and investors on our Finance channel.

Tags: , , Last modified: June 10, 2022

Written by 12:00 pm News & Views, Finance