Last year, many were hoping for a return to normality after several months of health restrictions. Few anticipated the next storm that society would face as economic disruption has brought back the spectre of high inflation that many experts had declared dead for more than a decade.
The optimism linked to a post-COVID bounce has turned into concerns over a cost-of-living crisis and a potential recession. While political leaders and policymakers are busy defining strategies and tactics on how best to mitigate the effects of inflation at the macro level, many families need to do their planning to absorb the shocks of rising prices on their lifestyles.
Different households have different risk tolerance thresholds that determine the kind of budgeting that they need to adopt. Cutting down on discretionary spending will be enough for some to see them maintain their living standards without too much pain. Unfortunately, for many others, meticulous budgeting becomes a survival necessity.
Inflation in the eurozone has now hit almost nine per cent. Subsidies on fuel, electricity and some food items have sheltered many families from imminent financial distress. Still, the rise in prices of other products and services is unavoidable.
Old-fashioned inflation-beating family budgets are one way to prepare the defence for most households. It is shocking how many of us only have a vague idea of what we spend and on what. It is time we all get a good idea of where all our money is going.
Today it is easier than ever to carry out the tedious task of preparing a budget as information is readily available thanks to the internet and mobile banking. One can access the bank statements online and feed the details in an excel spreadsheet. Using a pen and paper will also achieve the same objective.
Go through and categorise your spending, identifying what goes on monthly bill payments, essentials, shopping, travel, children, socialising and entertainment. Just seeing these items will help you to feel more in control of where your money is going. You can then start to determine what expenses can be eliminated or reduced.
It is shocking how many of us only have a vague idea of what we spend and on what
Many of the services we take for granted, like cable television, water and electrify, gym subscriptions, club memberships and subscriptions, are often billed with direct debit. Go through your list of direct debits and determine which ones need to be cancelled or better managed to save on your monthly expenditure. Some services, like water and electricity, are indispensable but adopting frugal tactics to cut waste and excessive consumption can save you considerable amounts.
Another issue that needs to be addressed with great care is managing loans and savings. Younger families are often burdened with house loans spread over decades. Still, if these families have idle money in their bank accounts earning little or no interest, they need to consider whether it is more effective to mobilise their idle cash by repaying part of their loans ahead of time.
Households with significant savings have been suffering for a long time because of low-interest rates. Some have unwisely opted to invest in non-investment grade bonds in search of yield. It is time to consider other alternatives. For some, investing in quality European equities that have a record of paying decent dividends could be one such alternative. Buying electronically traded funds of such equities could help to spread the risk.
One of the golden rules of budgeting under challenging times is cutting discretionary spending and investing the money saved. We have become so used to instant gratification, but saving for a rainy day could give you the peace of mind that no holiday overseas or habitual weekend visit to high-end restaurants can guarantee.
Investing is a long-term game. You need to be aware that prices go down and up, particularly over short periods such as one year. So make sure that you have the liquidity you might need for at least the next six months and keep away from speculative investment, especially if your risk tolerance is low.
One last inflation-beating tactic is to look beyond your immediate environment and try to help anyone you know who is really struggling finically. Some financially distressed people may need advice to manage their situation better.
Many others may need more concrete help. Older extended family members may depend on their fixed pensions to get by. If this is not enough, offer a helping hand, especially if you owe these people a large amount of gratitude for what they have done for you in the past.