UAE: How do I protect my spending power from inflation?

Inflation – the rise in consumer prices – is a slow erosion of your money over time. Before 2021, multiple economies worldwide haven’t seen annual core inflation much above the current level for the better part of 25 years.

So the spike seen globally over the past year in the costs of fuel, used vehicles, groceries and just about everything else is the kind of sudden and systemic rise that can give a jolt to most peoples' everyday spending.

With inflation chipping away at your spending power, how can you protect yourself? Here are four steps financial planners recommend that’s practical for everyone.

Step #1: Examine your spending

• Trim discretionary spending, voluntary spending in categories like entertainment (leisure activities you take part in, be it movies, art, expensive hobbies etc.) or travel, by just 5 per cent. This is one of those incremental changes that isn't that difficult to do and goes directly to your personal bottom line.

• Don't delay a major purchase as prices will likely rise.

• Shop strategically. Buy more generic brand products and prescriptions. Save on necessary expenses by using coupons and store loyalty programs. Use rewards cards to pay less for fuel – although the savings may seem too less initially, keep in mind that it adds up.

Step #2: Look for savings

• Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). Many banks nowadays, particularly digital banks, are waiving such fees and credit cards often have fee-free options.

• Re-negotiate your television cable, streaming or cell phone packages for any possible savings.

“I can say from my own personal experience - it's amazing how easy this is,” said Michael Ashton, who works for a US-based consulting and investing firm.

He said that every time he would call his cell phone provider, it would offer him a plan that was far better than his current one. “And it doesn't happen unless you call,” said Ashton further explained.

He now makes a habit of calling once a year and asking, “What's the best plan you have and should I be on that?” – a step that he also recommends to his global clients.

• Reduce the number of subscriptions you have, even if by just one. This can include subscriptions to any periodical digital products or media streaming services. 

“You should do an audit of those from time to time because sometimes they sneak in a price increase, and it just shows up on your credit card,” Ashton added.

Step #3: Look out for ways to bring more money in

Search for financial institutions that pay higher interest rates than you are earning now (if you are earning anything at all). Online banks often offer high-yield savings accounts that sweeten returns, especially as interest rates are on the rise worldwide.

Is there a possibility for a salary rise this year at your firm? If you haven't received an increase in salary in a few years, you've likely experienced what amounts to a pay cut because of inflation, Ashton added.

Step #4: Put money in inflation-fighting savings bonds

Another inflation-fighting idea: Savings bonds. They are available in every country worldwide specifically to protect consumers' purchasing power against inflation, said Zvi Bodie, a senior finance professor. Bodie holds a doctorate in economics from the Massachusetts Institute of Technology (MIT) and has become an avid proponent of I bonds.

Savings bonds rates are keyed to the rate of inflation, which lately has been over the top, he noted. They are a perfect safe haven for near-term savings. And not a bad addition to your long-term nest egg, too.

A minimum investment in such bonds is minimal, and an individual can put up just thousands annually into the savings bonds with electronic purchases. The bonds pay fixed interest plus the inflation rate, adjusted twice per year.

In most cases, you can withdraw your savings without penalty after one year, but if you cash them in before five years, you'll lose the last three months' worth of interest. However, you need to check this with your regional bank.

“So what you get is essentially a savings account that can't go down, and that's going to go up with inflation,” Bodie added. “Do I need to say more?”

Verdict: Inflation is never the same for everyone

Although inflation hit a decade-high in January in most countries, but that's not likely to be your inflation rate, said Ashton.

You may consume different items than the average person and you may not live in an average place, so your particular rate of inflation quite likely varies from the average, according to Ashton.

So, rather than agonising over a single number as a spending power loss to recoup, use the small money moves above to improve your financial position slowly but surely.