With savings and investments in flux as we step out of a world in lockdown, we face subtle threats to our personal finance. Inflation rates in Bermuda have been increasing quickly, including in the food and health sectors, but you can still make your money work for you.

Reading Inflation hits highest point since 2017 left me considering the financial questions many of us are not asking ourselves. Do we understand inflation and its impact on our wallets? And how can we prepare against inflation to stay one step ahead?

Finances are highly personal and can be quite a sensitive topic. Being told that the dollar in your pocket is slowly depreciating over time is not something anyone wants to hear, even more so when it is directly impacting their health and finances. The depreciation of money and rising costs is a circular issue that many are not equipped to resolve by themselves. How can anyone get their money to work as hard for them as they work to earn it? Understanding inflation is key.

There are numerous ways to look at inflation, but the simplest explanation would be the overall rise in prices for goods and services. These increases affect your purchasing power over time – that is, what each dollar can buy. Take the example of a loaf of bread. When my grandfather was my age, he could buy a loaf for 20 cents, whereas now it costs me more than $5. In short, money loses value when its purchasing power falls because, over time, the cost of goods increases and will continue to increase due to inflation.

Inflation works its way through the system in different ways. Covid-19 showed us how unexpected shifts occur. As factories are shut or low on staff, production of goods decreases, resulting in limited stock of these items in grocery stores. Meanwhile, the demand for products remains the same or rises, leading to an inevitable increase in prices. Some early warning signs are increased demand for raw materials such as oil or lumber and increased wage growth in the correlating sectors with a greater need for labour.

From a local perspective, we have seen an increase in the cost of electricity due to the increased cost of oil. Shifting our view to the neighbouring US, we are seeing a push in wage growth. In an effort to get staffing levels back up, companies are improving their wage offering and are providing additional monetary incentives. This increase in company overheads impacts the cost of goods and services because they pass on those costs to the consumer. It is important to watch the trending numbers of neighbouring countries, as they are good indicators of trends already in place, or changes soon to be coming.

To protect yourself, choose investments wisely – go for educated investing that will give you a return greater than the current rate of inflation or at least keep up with it. For example, if the inflation rate is 2 per cent and your money is in a low-interest savings account that is earning less than the inflationary rate, then your money is losing value even though you cannot see it in your bank statements. The amount of money you have saved may not go down, but what you can buy with it will.

There are two economic groups in every society: a fixed-income group – those with income coming from social services, rent or retirement savings; and a flexible-income group – those that are still working. When we work, our wages generally rise with the cost of goods and services, keeping pace with inflation. People with fixed incomes lose more than those with a flexible income.

When we are living from savings or drawing from pensions, inflation can take away our income. It is imperative to build a retirement plan where you consider inflation risk. Think of your retirement years in stages and, when planning, assume expenses will increase around 3 per cent a year around health and other needs. This allows you to take a “spend now” approach – you should still be able to enjoy life, after all.

It is never too late to move your money in a smart and calculated way. Here are a few tips to help you get ahead financially.

First, it is important to diversify your money and pay close attention to the investment risk and rate of return. Diversifying might mean holding a low-risk savings account to protect against loss in the short-term and support your emergency fund needs. Adding a mid-term, medium-risk savings investment will provide a better rate of return in the long-term to support your future goals.

Second, if you can, try to pay down any debt instruments that you may hold such as credit card balances and loans. This simple step can be helpful for keeping you on the road to financial sustainability and success.

Finally, once you have set your goals, create a financial plan and review it at least once a year. Seeking advice from a qualified financial adviser can help you map out a practical path to support your goals.

Setting yourself on the right path is achievable. There is no better time than today to start.

Melvin Nusum is the Head of Client Management at the Argus Group, where he provides employee benefit and insurance solutions. He has worked within the financial services industry for more than 13 years, including HSBC, Wells Fargo and New York Life, helping individuals secure their financial future and support corporations in improving their cash and investment portfolios.

DISCLAIMER: The content in this article is for informational purposes only and is not intended to be a substitute for professional financial or investment advice.