Inflation is a financial danger that is quite underrated but has the potential to slowly wipe out your savings.
Inflation relates to the buying power. When you start paying more to purchase the same quantity and quality of products and services, it is bound to affect you. And mind you, this change is not always very visible. Brands are known to increase prices at a slow & steady rate so you may not realise the impact much.
What is Inflation?
Inflation is known as a widespread, ongoing tendency of rising prices from one year to the next. The inflation rate is a crucial economic term because it illustrates the rate at which an investment loses real value over time and the decline in expenditure or buying power. Additionally, Inflation gives investors the precise percentage return their assets must yield to preserve their quality of life.
Basically it’s when there is too much demand for too little supply of goods.
What causes Inflation?
The main causes of inflation can be grouped into three broad categories:
- Demand-Pull,
- Cost-Push
- Inflation Expectations.
- Devaluation
- Rising Wages
- Policies
For example – Inflation in the UAE, Gulf Cooperation Council (GCC) countries and the wider Middle East and North Africa region is predicted to spike this year due to an increase in food and commodity prices after the Russia-Ukraine war, say economists.
Source: https://www.khaleejtimes.com/uae/inflation-in-uae-gcc-countries-set-to-spike-this-year?_refresh=true
Now let’s take a look at how inflation affects your investments?
Depending on the sort of investment, inflation may have a different effect on each.
Inflation can negatively affect the performance of assets with a fixed yearly return, such as conventional bonds or bank certificates of deposit because you receive the same interest payment each year. Inflation may or may not affect equities.
Generally speaking, while the economy is strong, inflation is high. Businesses may be selling more, which would boost the value of their stock. Although this lowers their worth, companies will also have to pay more for labour and raw supplies. The corporation’s success in holding a stock can determine whether inflation will assist or hinder it.
Investors in the stock market hate “recession” and rush to sell their assets to either book gains or minimize losses. We are currently witnessing ongoing selling pressure due to the impending recession in the markets. You can also record profits or reduce losses to get your money out if you are a short-term investor or your objective is approaching soon.
Read 3-steps-to-overcoming-fear-of-investing
However, if you want to invest long-term, you shouldn’t worry too much as this is just a temporary phase of the economy. Usually government policies become more accommodating if they think the economy has shrunk more than required. The economy and stock markets will once more see growth as a result of this. You should rebalance your portfolio and make additional purchases today to minimize your average holding expenses.
How Can Inflation Be Planned For?
Inflation Rate in the UAE increased to 6.77 percent in the second quarter of 2022 from 3.43 percent in the first quarter of 2022.
source: National Bureau of Statistics, United Arab Emirates
Although inflation in Dubai is something beyond our control, we can definitely plan & prepare for it.
Inflation most commonly affects assets such as real estate, bonds, stocks, commodities & debt.
The first thing that comes to mind while preparing ourselves for inflation is ‘earning more income’ but we can all safely agree that it’s easier said than done.
So we can look at the below:-
- Firstly CONTINUE to invest: It’s often tempting to slow or stop investing to cover current living expenses during inflation. That may improve your short-term situation, but it could be a disaster for the long-term. One of the best ways to improve your overall financial situation is to continue investing even during high inflation.
- DIVERSIFY your portfolio: Not only should you continue to invest but also look at diversifying & re-balancing your investments in Dubai. Look at alternative options such as a mix of commodities, inflation-protected securities and equities to offer some security.
You may want to consult a financial advisor in UAE for this.
Read why-you-should-employ-a-financial-adviser
- THINK TWICE before making major purchases: Not everything will always be more expensive. Some price hikes could be temporary, and, in that case, it may pay to hold out. You can defer purchases that are not immediately necessary. Also make sure you do not add to your debt further. You can also look at deals before making any big purchase.
- Continue to build your EMERGENCY Fund: The conventional advice is to have between 3-6 months living expenses in your emergency fund. But recessions and times of inflation make it a solid case to have even more. It’s always advisable to follow a holistic financial approach.
- Financial KNOWLEDGE: In the times of self made gurus, it’s important to take advice from a trusted source. You can always upgrade your financial knowledge by working with a qualified financial advisor in UAE who will be able to help you achieve your financial goals in UAE.
Read 5-things-to-consider-when-choosing-a-financial-advisor-in-the-uae
Just like any other uncertainties in life, it’s essential to be prepared for inflation. It requires a different way of thinking and behaving, and affects everything from spending habits to investment decisions. Follow strategies that will help us cope with the obstacles better.
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