Diana Clement: Warning – inflation is coming to steal your money

Watch out for the big bad beast of inflation in 2022. Inflation is already hitting New Zealanders’ wallets hard. According to Statistics New Zealand, annual inflation was 4.9 per cent in the third quarter of last year. The latest rate wasn’t available at the time of writing but was expected to match or exceed that figure.

Kiwibank chief economist Jarrod Kerr says inflation is like a thief in your wallet or gremlin in your bank account. It steals money.

Inflation means the price of many goods and services you buy are going to rise even more this year. That doesn’t just include essentials such as food and petrol. It includes mortgage repayments thanks to the RBNZ putting up interest rates to counter inflation.

Kiwibank is expecting inflation to rise to 6 per cent in 2022, then drop back a bit, although remaining higher than the Reserve Bank of New Zealand’s (RBNZ) target rate of 1 to 3 per cent.

Inflation hits the poor hardest.

“Inflation isn’t equitable,” says Kerr. “It hurts those on lower incomes, more than it does those on higher incomes because you’re spending a greater proportion of your money on necessities.”

The first place to start to manage in an inflationary world is to revisit your budget, says Mark Lister, head of private wealth research at Craigs Investment Partners.

“I’m not saying it’s easy, but for some people it’s easier than they realise,” says Lister. “They just need to look at what they’re spending.”

A budget is a very good way of making limited money go further. It starts with understanding where the money is going, which can be confronting but beneficial.

Tiny budgetary leaks add up to large sums of money over a year or lifetime. A friend of mine pointed out to her poor-me niece that she’d spend $40,000 on fizzy drinks over her lifetime if she kept up her habit at the rate she was consuming them. These insights are a great way to shock yourself into change.

With a working budget, you can also control what’s going out by halting all spending in a category once you’ve hit the monthly limit. That includes food for most people whose pantries are stocked with weeks’ worth of ingredients, some of which will end up being thrown away.

The budget deals with the here and now. In an inflationary world, we need to consider the long-term health of our investments – ranging from Kiwisaver to property.

First off, the buying power of term deposits and other savings falls. That hits those people saving to buy a home or other purpose and those people who live off term deposits, says Kerr.

“It eats away at the value of your money over time,” he says. “If you’re a retiree with $100,00 sitting in the bank earning 2 per cent and inflation is running at 5 per cent you’re losing money.”

Kerr points out that KiwiSaver and other growth funds tend to beat inflation, as do property markets. Balanced and conservative funds may not, because bonds, which make up some of those investments, don’t tend to do well in inflationary times.

With inflation raising its head this is the time to understand your risk tolerance and take advice to ensure you’re in the right investment, says Katrina Shanks, chief executive of Financial Advice New Zealand.

Not everyone can stomach a growth KiwiSaver and/or investment portfolio or are at the right stage in their lives to be in growth. “If you are in a growth portfolio that should keep you ahead of inflation.”

You may find your capital eroded by inflation if you’re in conservative investments, says Shanks. But at least with advice and an understanding of your risk tolerance you’re not going to choose an investment that is eroded more than need be, or results in you losing sleep if it endures sudden falls.

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