How to Prosper Despite Higher Inflation

Well, how about that inflation?

If you’ve been living under a rock, the cost of living is on the move.

Until recently, the last decade or two has more or less been a period of relatively stable, low inflation.  But we’re now in a different environment.

How long this higher inflation lasts is yet to be seen.   But the reality is, the cost of many things is going up faster than normal right now.

So, are we just supposed to suck it up and feel a little poorer?  No!

In this article, I’ll share a few things we can do to deal with higher inflation.  Because around here, we like to be proactive and find solutions and workarounds, rather than throwing our hands in the air and complaining 😉

I’ll also share some important reminders that seem to be ignored by most people in favour of fear-mongering.

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Wages

Many workers are now in an excellent position to negotiate a wage increase.  Labour markets are relatively strong at the time of writing, and many workplaces are struggling with a shortage of workers.

For a long time, the pendulum has leaned in the other direction, with the jobs market not quite strong enough to give the average worker enough leverage to push hard for an increase.

But each worker is now more valuable than before given a scarcity of labour and skills.  So it’s as good a time as any to push for better pay.

And if your current employer won’t play ball (or even if they will), shop around for an employer who remunerates their staff better.  More ideas on increasing your income in this podcast.

Bills

We’re now in an environment where people are expecting the price of things to rise.  Companies will know this and quickly pass on cost increases they may be facing.

But this also breeds complacency.  If we expect prices to be higher, we’re not surprised when, for example, our insurance bill gets jacked up.  And because we’re expecting it, we may be less likely to think we’re getting screwed.

So we need to keep an eye out on these price increases and then combat that as best we can (ideas in a minute).  Whether it’s groceries, our mortgage rate, electricity, everything.

This is the time to be vigilant and develop an eagle-eye for high priced shenanigans.  We need to ask ourselves, is this price reasonable?  Are there better deals out there?  But don’t just wonder, go check!

Once you can’t nail down any more deals, we then move on to…

Lifestyle tweaks

Despite the popular defeatist-style attitude “this sucks and there’s nothing I can do about it” that most people adopt, we don’t fall for that nonsense around here.

In truth, there’s actually heaps we can do to soften or even sidestep some of this inflation.

Remember, the inflation numbers we see are simply a metric which tracks a made-up basket of goods and services in an attempt to represent an ‘average’ lifestyle.  It doesn’t mean the price of everything is going up.

More importantly, it doesn’t mean you have to accept it!  Here’s a few ideas to get started.

Car costs

One noticeable item of inflation is fuel.  What can we do about this?

Switch to a smaller, more fuel-efficient vehicle.  No point complaining about fuel prices while driving a large SUV (Simply Unnecessary Vehicle), with the almost-inevitable monthly loan repayments.

Make an effort to combine multiple errands into one trip and minimise driving where possible.  Do more activities close to home in your spare time.

Take public transport and get a break from dealing with other drivers and traffic.  You might even enjoy it and then decide to get rid of your car (or reduce from 2 to 1 car for the household)

You could also consider working from home as many days as your employer will allow.

And compare fuel prices before you buy.  There are different price comparison sites which tell you the best priced fuel in your area.  In WA we have FuelWatch.  In NSW its FuelCheck.  Another one called Petrol Spy covers all states.

But don’t be one of those clowns who drives 18 minutes further to save 2 cents per litre, sits idling for another 12 minutes, and then buys a $7 treat to reward yourself inside the servo.  You’re not saving money, you’re burning it.

Food

I’ve personally noticed the price of our groceries spiking in recent months.  Some things are up like 20%, while other items haven’t moved at all.

What can we do about this?

Well, we can choose to eat more of the foods that haven’t jumped in price.  This simply means being selective, rather than stubbornly insisting we eat exactly the same thing no matter what.

Or, as Mr Money Mustache once described it, grocery shopping with your middle finger.

Sure, we won’t be able to do this for everything.  But it’ll definitely help.  Other than that, we can of course go back to our tried and true strategies for optimising our grocery costs.

I know I’m walking the line here, but according to ASIC, this is unlikely to be financial advice 🤣

Rent

For the first time in a long time, rents are increasing quickly across most of Australia.

There are a couple of ways to approach this.  As a renter, you might want to consider relocating to a lower cost area or property type to soften the blow.  Or, you may want to get a housemate to split the bill, if you haven’t already.

Moving to a slightly smaller property can often save you thousands per year.  This is made easier once you take a few principles from Minimalism.

If you’ve been a good tenant, you can also negotiate a smaller than average rent increase.  I think most landlords would recognise the ease in keeping the same reliable tenant, rather than paying leasing fees to try and get the highest possible rent.

Mortgage

For the last couple of years, we’ve had the lowest interest rates ever, especially for fixed rate home loans.

That’s over now, with rates jumping much higher in a short space of time.

That said, there’s still a lot of competition in the mortgage market.  So make sure you’re shopping around and staying on top of what a ‘good rate’ looks like for your particular loan.

Let’s stick with the topic of loans because it’s such a big expense for most Aussies.  There are two schools of thought on dealing with debt, inflation and interest rates, with pros and cons to each.

Two approaches to debt during higher inflation

Option #1:  Take on debt to increase your investments.

Over time, inflation eats away at the real value of debt.   Plus, your assets and the income they produce, will increase over time, likely faster than inflation.

The risk is, you’re more exposed to rate rises in the short-term.  If you have ample cashflow, this could be the most profitable long term approach, as asset values eventually increase and your debt is deflated away.

As interest rates rise, it also then gives you a more productive place to park your cash, either in an offset account or by making extra repayments.  Saving yourself 4% interest is obviously better than 2%.

Option #2:  Pay off debt to reduce risk and increase stability.

Some people opt to pay down debt when interest rates move higher.  Using cash to extinguish a mortgage when rates are higher is effectively locking in a higher return on that money.

This also gives you certainty.  There’s a risk that interest rates could stay elevated if inflation sticks around in a meaningful way.  Removing debt from your life removes the risk of interest rates hurting your cashflow.

This can be especially helpful for those approaching retirement or even semi-retirement.  Normally, this is when people prefer greater certainty as they move into the next phase of their life without the warm embrace of a full-time paycheck.

Here’s a couple of other things we should remember about inflation.

Asset prices may come under pressure in the short-term

The value of shares and real estate can often be discounted as rates rise, especially when there is fear and uncertainty around.  The majority of us buy real estate with borrowed money, so a rise in rates means property becomes less affordable.

Generally, it also means businesses have higher borrowing costs and people have less money for discretionary purchases, becoming a drag on profits of certain companies.

Having said that, real estate and businesses do provide a good hedge against inflation.  Rents increase over time, while the cost of building, renovating, or replacing a property also increases.  This means the underlying cost of real estate increases, even if sale prices dip in the short term.

Businesses also have the ability to increase earnings with inflation (or more).  Companies, in many cases, are able to pass on cost increases, allowing profits and dividends to keep climbing during periods of inflation.

Keep tabs on your annual dividend income as things change by using the spreadsheet I created.  I’ve used it for years as a way to help me plan my finances and watch my progress.  Get it below.

Hoarding cash can be harmful during high inflation

In a time like this, the media is having a field day feverishly putting together as many emotional and pessimistic pieces their journalists can muster.

Naturally, this makes many people nervous about the value of assets they own (see above).  But what should be more worrying is the inevitable loss of purchasing power by holding large amounts of cash.

The longer you hold it, and the higher inflation is, the more purchasing power you lose.  Of course, at this point people say something like “well I’m just holding it until the time is right to invest it.”

To which I’d say, “and when will that be?”  If you’re being honest, the answer for all of us is, “I really have no idea.”

People played this mental game during the COVID recession in 2020.  I know because I was getting emails and comments from these people.  Go back and see what I said during that period- it’s really fascinating the mental gymnastics people were doing at the time.

It’s not the end of the world

If inflation is higher than normal for a while, the vast majority of people will be absolutely fine.  Unless you’ve built your life upon a mountain of consumer goods, luxurious lifestyle expectations and the assumption that your million-plus-mortgage is absolutely fine because rates will be at 2% forever, then you’ll survive.

Nobody wants to believe this, but inflation has actually been pretty low during the last decade (hence all the rate cuts and stimulus to try and juice up the economy).

In the end, I personally believe inflation will end up back at low-ish levels.  The power of technology seems likely to keep making things cheaper over time.  Add to that, the competitive nature of business to become more efficient and outdo their rivals with better and lower-cost offerings.

Not everything obviously, but generally.  And, importantly, I mean cheaper relative to our wages, not lower prices.

Yes, wages may be lagging inflation right now.  But incomes are overwhelmingly likely to catch up over time and outpace inflation once again.  Just as they have for the last 10, 20, 50, 100 years.  See this podcast and this article.

I’m not saying everything is puppies and rainbows.  I’m merely pointing out that it never makes sense to succumb to the victimhood narrative, because this media viewpoint always lacks perspective and never holds up to scrutiny.

Side note: I’ve strongly considered making it a pet hobby of mine to destroy mainstream finance articles by picking apart their inconsistencies, contradictions and whiny defeatist attitude.  But then most of my time would be spent in a state of fury, so probably not the best activity for my happiness levels (would be fun at times though!).

Final thoughts

Of course, the price of all sorts of things is going up, not just what I’ve mentioned here.  But there’s plenty of other content on this blog to help with that!

In times like this, you’ll want to pause and think about each purchase before going ahead, or questioning that area of your life more closely instead of accepting cost increases as unavoidable.

Shop around, tweak your spending habits, improve your income, and engage in plenty of enjoyable low-cost activities.

You could opt for a leaner year-or-two until inflation settles down a little.  In fact, I recommend you see this inflation as a personal challenge.   Are you going to let these higher bills walk all over you, or are you going to do something about it?

Treat this period as an opportunity to flex your frugality muscles.  Then, regardless of what happens, you’ll  come out personally and financially stronger on the other side.

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Thanks for reading! 

Here are some resources you may find useful on your wealth building journey:

Sharesight: A great portfolio tracking tool for share investors, and free for up to 10 holdings.  It tracks all dividends, franking credits and capital gains, which is incredibly helpful at tax time.  Saves me a lot of time and headache!

Mortgage broker: My personal broker of 10 years is More Than Mortgages.  Highly rated and award winning, Deanna and her team been super helpful over the years and can assist with anything home loan related, including refinancing and debt recycling.

My book: After 5 years and hundreds of articles and podcasts, I decided to distill everything down into an easy to follow book.  Designed as a complete roadmap to achieving financial independence and retiring early in Australia.  Available in paperback, ebook, and audio.

Just so you know, if you choose to use these resources, this blog may receive a financial benefit at no extra cost to you.  Thanks in advance if you do.  And to be clear, I only ever recommend things I use myself and genuinely believe in 🙂