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Protecting your Disposable Income from Inflation



Emmanuel Allottey


The economic impact of the pandemic has ravaged household incomes leaving many facing financial hardships. African nations are facing the worst recession in twenty years threatening to reverse decades of progress achieved. Economies are expected to rebound in the second half of the year.

Inflation, the gradual increase in the cost of goods and services is likely to accelerate to unprecedented levels as businesses and governments take decisions to quicken their path to recovery and profitability. The following steps will provide financial protection against looming increase in cost of living.

Inflation has a direct impact on purchasing power. The biggest way to protect your purchasing power is by increasing your source of income. The increase in disposable income should be higher than the annual rate of inflation.

The annual rate of inflation is publicly available information that shows the increase in cost of goods and services. Investments, retirement savings and deposits need to be re-invested in higher yielding instruments and deposit products to hedge against the impact of inflation. Exploring an additional source of income will augment the impact of inflation, however consideration should be given to the increased cost of tax liability payable as income increases.

Reduce monthly commitments: adhering to a strict budget that eliminates non-essentials will improve disposable income. Payment of high interest on debt borrowing such as credit cards will see an increase in minimum payments due as inflation increases. Should the cost of fuel increase, it is frugal to consider switching to a mode of transport that is fuel efficient and less costly.

Eliminating discretionary expenses such as gym memberships or magazine subscriptions will unlock further disposable income. Other increases in areas such as accommodation, utilities and groceries can be mitigated by downsizing accommodation or sharing of resources. Home sharing, car-pooling, are some examples of options to spread costs incurred with second and third parties.

Start investing there are numerous investment options aligned to the needs of individuals. Investment policies, simple and complex provide high yield solutions. An example is an educational policy which assists in covering the future cost of children’s education. However, knowledge of the terms and conditions is key as some investment instruments carry an inherent risk and may charge exorbitant fees for termination of the investment. Equities and stocks, over time have the potential to grow dividends and capital appreciation to protect against inflation.

As inflation unfolds take the necessary steps to protect your disposable income. If you are facing financial hardships contact a financial counsellor to explore options available.

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