Every Kenyan is hurting when they see the prices of commodities rising. Prices of essential commodities such as food and energy products continue increasing. As a result, many people are struggling to keep up with the cost of living. Truly, the Russia-Ukraine war and Covid 19 pandemic have hit us hard.
The bad news is that the prices of consumer goods are not falling any time soon. Economists predict inflation to continue rising for the rest of the year. As expected, the cost of living is going to become more unbearable. Therefore, there is no better time to plan your finances than now.
But how do you manage your finances during inflation? It is quite simple. Read the tips below on how to secure savings or investments.
I. Budget and Cut your Spending
This is the simplest way to beat inflation. As commodity prices skyrocket, you need to tame your over-spending habits. First, create a personal budget. Make a list of all your wants and needs. Identify things or commodities that you spend unnecessarily cash on.
For example, you may be spending a lot on take-outs or subscriptions such as Netflix. Amid inflation, you need to cut spending on such things.
Also, consider adopting creative ways of reducing daily expenses. For example, look for cheaper buying options for clothes and appliances. Take advantage of stores’ discounts and promotions on clothing and household items.
Controlled spending reduce the rising costs’ effect on income. In other words, you get to preserve your purchasing power. In addition, you can be left with some money for investing.
II. Evaluate your Investments Portfolios
You should go over your investment portfolios during inflation. Why do this? You risk losing money if you invest in the wrong ventures. To hedge against inflation, you hold your money in “safe assets or investments.”
A “safe asset or investment” generates higher returns than the average inflation rate. For example, savings account that yields 8% p.a when the inflation is at 7%.
With such an investment, you won’t lose your money value. Similarly, you can maintain future purchasing power. Therefore, consider diversifying your portfolio towards ventures that overtake inflation.
NB: Attractive yields beyond inflation rates don’t necessarily mean an investment is devoid of other risks. Before settling on a stock, property, or saving account, factor in other risks.
III. Invest in Real Estate
Real estate is a valuable asset to place your money in to hedge against inflation. Despite uncertainties brought by inflation, real estate value increases during economic instabilities. The appreciation in value results from increased real estate prices and rents.
There are two ways of investing in real estate or properties. You can buy a piece of land or a house directly if you have substantial savings. Even if you are low-income earner, you can still invest in properties through real estate investment trusts (REITs). Examples of Reits in Kenya include Ilam Fahari I-Reit, Acorn income Reits, and Acorn Development Reits.
A land or building may take time to appreciate. Unless there is substantial demand, investments in properties are only suitable under a long investment plan.
IV. Put your Money in Money Market Funds
Money Market Funds (MMF) are great places to store cash because of their high yields. When you invest in MMFs, you buy instruments such as commercial papers, government bonds, and treasury bills.
These instruments attract favorable interest rates above inflation rates. In Kenya, many MMFs yields a rate between 7–10%. With the inflation rate expected to rise to 7.2% per year, MMFs are good places to invest money. Some funds you can invest in include Zimele, Nabo Africa, and Sanlam Money Market Funds. Expect to earn more than 9% interest rates when you invest in these MMFs. Get started on some of these funds with as little as Ksh1000.
V. Add another Hustle
Let’s face it. Every household is spending extra shillings to keep up with routine expenses. To cope with extra cash requirements, you should start a side hustle.
When not working for your boss, redirect your efforts and time to a side hustle. Think of something that you are good at, then monetize it. For example, sell graphic design services if your hobby is designing stuff.
VI. Avoid current accounts and bank savings accounts.
As said earlier, the value of money is preserved if your investments generate higher yields than average inflation. If you place your money in a current account, you are likely to lose your money value. The same thing happens when you leave your money in specific fixed deposit accounts. How so?
Many current accounts do not pay interest. Here, your money gets eaten away by inflation since it does not grow. Similarly, your money gets wasted through a savings account. Many savings accounts in Kenya pay an interest rate of less than 7%, which is below the expected inflation rate.
VII. Watch out for Risky Stocks
Stockholders can get better at inflation by buying stocks. With stocks, prices tend to rise during inflation to counter company costs. Despite the upward surge in stock prices, you can end up losing your money if you invest in Kenyan stocks.
Even though the expected returns from Nairobi Stock Exchange (NSE) stand at 12%, the Kenyan stock market is performing poorly compared to other markets. Share prices are declining, and many investors are losing a lot of capital when selling shares. This is because many NSE-listed companies are incurring huge profit losses. Hence, it is wise to hold on to buying Kenyan stocks during this time.
Bottom Line
The rising inflation requires we change how we spend and invest our money. A great way to stay ahead of inflation is by investing wisely in a selected portfolio that attracts high-interest rates than inflation rates. You can also achieve the same objective through controlled spending and budgeting. Whatever method you choose, ensure your money is growing. For more financial advice, seek a professional from your financial consultant.
