It’s the “biggest financial risk” this year, says Barefoot Investor
One of the biggest threats to our finances this year is mostly invisible, but it's something none of us can hide from.
Over the last 2 years, we've seen a recession start (and then technically end), mass job cuts, the share market crash then rise and historically-low interest rates. We're once again seeing stock prices tumble and housing affordability is only getting worse.
But in his weekly newsletter, The Barefoot Investor Scott Pape said inflation is one of the biggest financial risks at the moment.
Inflation is on the rise
"The price of stuff is currently rising at the fastest pace in 11 years," he said.
Inflation is not something that happens overnight, but by the time you realise it's happening, it can often feel that way.
The most obvious way to see inflation happening is to consider the cost of everyday items. We're already seeing the cost of things go up. The most obvious are petrol prices, but fresh produce and consumer staples have also been rising.
And it's only going to keep climbing from here.
The government predicts that inflation will reach over 4.25% by the middle of the year, up from the current level of 3.5%. Countries overseas are seeing even higher inflation rates than we are in Australia.
"Think of inflation like being stuck on a treadmill that keeps getting faster and faster. You have no choice but to keep running. Otherwise, you'll faceplant and be ricocheted into the poorhouse," Pape wrote.
How to beat inflation
The main way to keep up with inflation is to ensure that your income is rising at the same rate as the cost of living. If the cost of living rises but your income stays the same, you'll have less buying power than before and less money left over for saving, investing or paying off a mortgage.
"If you don't get at least a 5% pay rise this year, you'll be going backwards," says Pape.
So as a first step, work out what pay rise you need to keep up with inflation and speak to your employer about how to make this happen.
It's also a good time to do a general tidy up of your finances. Make sure you're not paying more than you need to for anything. Spend an afternoon comparing your energy bills and health insurance or seeing if you could refinance to a better home loan.
There are things you can do to make your money work harder this year and keep up with (or beat) inflation. Depending on your risk tolerance, you can open a high interest savings account, or start investing in index funds.
