Strategy 1 for Beating Inflation

This article is the first part of a two part series that explains the problems of inflation to the average person and two strategies to help that person beat inflation. I hope that the information will not be too economics based and will actually be practical advice that the reader can utilize.

Inflation Information

Picture from Kittisak
Quite simply, Inflation is a measure of the rise in the average price of an 'average' basket of goods. There are a few different measure that include different weightings for different goods. People tend to view inflation  above 2% in a negative light. Higher inflation means that the cost of living is going up and that savings are being eroded.

Inflation Interpretation

Let us say for example that you have an annual income of £20,000. You also have £10,000 of savings in a savings account that receives an annual rate of 5% (I wish!). However, inflation is rife at 10%.

For your savings this means that you are actually losing money! This year you will gain £500, however you will have lost £1,000 in spending power. This amounts to an overall loss of £500 in the spending power of your savings.

For your spending habits, this means that if you buy the exact same goods as last year you  will only be able to buy 10% less. This will feel like you can only spend £18,000. This is where we turn to our first Inflation Beating Strategy.

Inflation Strategy

As I mentioned above, the problem with Inflation is the loss in spending power. Inflation is calculated on the 'average' basket of goods that the average person in society buys. This does not mean that all goods have increased by this price. Some have increased by more and some by less. Without actually having watched the prices rise week to week, it is difficult to know which goods have increased by more.

However, there is one thing that you can control when is comes to buying goods. You can control your spending power. In our scenario you have lost £2,000 worth of spending power when it comes to purchasing the 'average' basket of goods. The simple strategy is therefore to try to recoup this lost spending power. This can be achieved by downgrading the type of brand of goods that you buy, ideally to non-branded goods.

Some of you may argue that surely some of these have gone up in price as well, and you would be right. However, this does not matter. Inflation is quite personal to how one is affected by it. If you normally wouldn't have bought non-branded goods (or store branded) then you will notice the increase in your spending power. It doesn't matter to you that this particular good cost 10% more the previous month. All that matters to you is that it costs less now that the alternative that you would have normally bought.


Readers, what are you inflation busting tips? Please share in the comments box below.

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2 comments

Katie said...

I like your idea of trying to recoup lost spending power by buying less expensive items. I already buy store brand products so that would not work for me but I am sure there are other things I could save on.

Mr.Moneybanks said...

There are always ways to recoup spending power, just need to get creative. Thanks for the comment Katie.