Five tips to beat the rising costs of inflation

Create a budget, prioritise spending, look for cheaper alternatives and invest to beat future inflation, personal finance experts say

Federal Reserve Chairman Jerome Powell holds a news conference following the announcement that the Fed raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, US. Reuters

The Central Bank of the UAE also increased its base rate for the overnight deposit facility (ODF) by half a percentage point point. Photo: Central Bank of the UAE

Residents with variable rate mortgages will feel the change as soon as their next monthly payment is due. Antonie Robertson / The National

Changes to credit card interest rates are expected within a billing cycle or two. Antonie Robertson / The National

Monthly instalments on personal loans and car financing are also set to rise. Razan Alzayani / The National

Inflation in developed markets has hit record highs, driven by energy prices, supply chain disruptions and food prices.

US inflation, for instance, has soared to a 40-year high of 7.9 per cent in the past year, propelled by the rising cost of petrol, food and housing.

Rising inflation rates around the world have not had as much of an effect on Dubai as on other markets, Helal Al Marri, director general of Dubai’s Department of Economy and Tourism, said this month.

The emirate maintains a diversified supply chain, continues to attract talent from around the world and ranks favourably on cost of living indexes.

However, inflation in the UAE is forecast to rise to 2.2 per cent this year from 0.6 per cent in 2021, according to the International Monetary Fund.

“There are both long and short-term effects of inflation,” says David MacLaren, a partner at Abacus Financial Consultants.

“While inflation can have an adverse effect on your financial future, it can also make it difficult to meet your financial obligations right now. That’s why it’s important to have steps in place to deal with inflation so you don’t end up going over your budget or, worse, relying on credit cards and accumulating debt.”

The Central Bank of the UAE increased its benchmark interest rate in line with the US Federal Reserve’s decision to raise rates on March 16 to rein-in inflation.

“Ballooning expenses and higher interest rates are making headlines, causing many people to wonder how to cope with the high cost of living,” says Vijay Valecha, chief investment officer at Century Financial.

“Individuals need to make some choices to avoid running up credit card bills to supplement their lifestyle, because higher expenses ultimately contribute to the overall cost of running your household.”

Here, personal finance experts offer their advice on how to deal with inflation to keep you on track.

1. Create or update your budget

One of the best ways to beat inflation is to follow a budget, says Mr MacLaren. This will ensure that you are watching what you spend and are only spending what you make, regardless of how inflation affects the cost of something like petrol. It will also help you determine your spending priorities.

“Be sure to have set budget limits for things inflation might affect, such as clothing, food and housing. Allocate your money at the beginning of the month and then stick to the spending limits,” he says.

You can be flexible by adjusting the spending amounts between budget categories but resist the urge to dip into your emergency fund or retirement savings, he says.

“Families should always have sufficient funds to meet any unforeseen events,” Mr Valecha says.

“Ideally individuals should save 25 per cent to 30 per cent of their income. A family should always have an emergency fund equivalent to six months of their salary to protect themselves against any extreme price moves.”

2. Prioritise spending

Sometimes, paying less for the items you buy is not enough, you may need to remove things from your budget and prioritise the items that are necessary, says Chris Davies, a chartered financial planner at The Fry Group.

Give up certain activities and expenditures that are “nice-to-haves” rather than necessary expenditure, he says.

“You can work out at the gym in your apartment complex and cancel your gym membership. Stretch the length of time between hair appointments by a week or two. Save on petrol by taking advantage of the metro a few times a week or carpool,” Mr MacLaren says.

“Try cutting back on your daily coffee habit or make your own at home and bring it to work in a travel mug. Don’t buy extra treats.”

If you want to buy something and have the money to pay for it, purchase it sooner rather than later in case the price goes up, Mr Valecha says.

Over the past year, the cost of cars, home improvement projects and holidays have all increased and shortages might put more upwards pressure on prices. If you can afford large purchases now, it may save you cash in the long term, he says.

3. Look for cheaper alternatives

As prices rise, your previous purchases may no longer be possible within your existing budget, Mr Davies says.

Consider how to reduce the cost of these by either looking for different brands or shops or buying in bulk for cost savings.

“Try less expensive or store brand foods, cleaning products and hair products. You may discover that there isn’t a huge difference in the quality or taste,” Mr MacLaren says.

“You may also want to switch to a less expensive store to save.”

It is also worth exploring free and cheap activities to do.

Your friends could also be trying to save money, so you might choose to stay in and watch a movie instead of going out to one, Mr MacLaren says.

Instead of eating out, inviting friends to a dinner party at home or hosting a games night are budget-friendly alternatives, he says.

4. Invest to beat future inflation

Any good budget will give you a buffer to save, which will not only allow you to set money aside for investments but also let you absorb some price rises without having to change your spending habits, Mr Davies says.

Continue to save and invest your money, especially for retirement, Mr MacLaren says.

“You do not have control over economic conditions, but you do have control over your spending and saving habits.'

Individuals can consider making investments in assets that can typically cope with inflation, Mr Valecha says.

“Several asset classes perform well in inflationary environments. Tangible assets like real estate and commodities are historically seen as inflation hedges.”

5. Pay down debt

When inflation is high, interest rates are generally increased to control the economy.

If you have any floating or variable rate debt, you need to be aware of the potential impact of an increasing interest rate environment on your budget and focus on paying down debt before that becomes an issue, Mr Davies says.

Now that the Central Bank of the UAE has increased interest rates, changes to credit card interest rates typically follow, usually within a billing cycle or two, Mr Valecha says.

“Set a limit to how much you can spend on your credit cards. This stops you from overspending and encourages you to reassess your daily expenditures in advance and reduce the interest paid on your loans,” he says.