Inflation – The thief in your pocket

Inflation - The thief in your pocket

Chances are you’ve been hearing the phrases “cost of living” and even “cost of living crisis” recently. It’s the latest hot button topic in the media. The question that naturally follows is, should I need to worry about it, and if so what is causing this “cost of living” crisis?

The answer to the first question is that life is becoming more expensive, but whether it’s a crisis or not really depends on your situation. If you already feel like you’re living week-to-week on your current income, it may feel like a crisis. If you are seeing the increase in living costs eat away at your surplus income, then it’s something that just needs to be managed as soon as possible. More on that later.

The answer to the second question is that a lot of the increases in the cost of living can be traced back to inflation which in turn is caused by several factors. We’ll take a look at these soon.

Why is inflation an issue right now?

The world we live in is a lot less certain than it was a few years ago, and as we’ve talked about in previous blogs – uncertainty tends to have a negative effect on the financial world.

We’ve got a war in Europe, we have the property market slowing down, and we have a once in a generation pandemic in the form of Covid. All of these factors contribute to rising inflation.

Covid is not only stopping people from being productive in New Zealand, it’s also strangling global supply chains particularly given the lockdowns it’s still causing in China. The war in Ukraine has further restricted global supply chains as well as created worry about the supply of things like natural gas and even grain. These restrictions on the flow of goods naturally push the price up of the ones we can access in New Zealand.

So who’s responsible for controlling inflation?

Generally speaking, inflation is a normal part of any economic model that is typically managed by the Reserve Bank which aims to keep it between 1-3%. Right now it’s officially at 5.9% (though we suspect this figure is actually a bit light) which is making some people at the Reserve Bank uncomfortable.

One of the most powerful tools the Reserve Bank has to control inflation is the Official Cash Rate (OCR). We suspect that if inflation increases much further then we will see the Reserve Bank increase the OCR by 0.5% to try and bring it back. This is major as the Reserve Bank typically only alters the OCR by 0.25%. So if this happens it tells us straight away that they are seeing inflation as a major problem.

But how does inflation affect me?

The unfortunate reality is that it really does hit you in the pocket. Inflation of 5.9% means that a typical basket of goods (think of this as your average weekly expenses) is now costing you 5.9% more than it did previously. It’s worth noting at this point that 5.9% is the average and these increases are always dispersed unevenly throughout. For instance, petrol is up 52% from last year, whereas rents are up roughly 4.5%.

This brings us to our first solution when it comes to tackling inflation; take a look at your expenses and make a budget. If inflation is at 5.9% then you can combat it by reducing your spending by 5.9%. Look at what you’re spending on things like electricity, subscriptions, groceries, takeaways and more. You might be surprised at how much you’re actually spending on the nice-to-haves. Make sure you get granular with your examination and be strict with yourself. Are you shopping with a list? Do you need Netflix and Neon? By being granular you can figure out which areas of spend are being hit the hardest by inflation, and therefore where you can save the most.

The next step is to question whether you have any untapped value that could help? For instance, could you get a boarder in to help pay the bills? Do you have a bach you could be renting? Think about things that could help you create extra income for yourself.

The harsh reality of inflation

We hate to be downers, but one useful way to consider the impacts of inflation is to take a great situation like a pay rise and consider what inflation does. Let’s say you’re a Kiwi who was making $100,000 (to use a round number) a year in 2021 and your boss gives you a pay rise of 3% ($3,000) in 2022 you’ll probably go “fantastic! Let’s celebrate”. The truth is though you’ve actually taken a pay cut of 2.9%… let me explain.

It cost you 5.9% less to purchase the same things last year, so that bottle of champagne you popped last year would have cost you $50. This year it costs $52.95. That spa pool you can finally splurge on last year would have cost you $10,000. This year it costs $10,590. So, yes you’re making more money, but because everything is relatively more expensive you’re actually in a worse position than you were last year before inflation and the pay rise.

The above is a useful thought experiment as it shows how pervasive inflation really is in people’s lives.

So, what’s the solution?

Simple. Walk into your boss’s office and demand a 5.9% pay increase to match inflation, and a 3% pay increase on top, because you deserve it. Actually, give me a moment… OK, that didn’t work. Time for plan B.

Once you’ve examined your obvious day to day expenses consider some of the less obvious things. Are you carrying debt? Is it possible to consolidate this so that you’re paying less in repayments? Do you have a strategy to get out of the debt?

We also advise our clients to remember that money in the bank is actually depreciating in value. A dollar in there today is going to be worth less tomorrow due to inflation, so you want to be thinking about how you can get more back from your hard-earned dollar – such as investing, which we understand, can be slightly scary at a time like this. It’s natural to think a nest egg in the bank feels like the best option, but the reality is, depending on your situation, there can be other really powerful levers you can pull to come out better off in the long run.

We understand this is probably beginning to get a little bit real so we really recommend getting in touch with our team, who can provide advice and who have access to our new investment packages that are being released in the next few weeks.

You can also check out our revamped Money Manager Tool. A lot of you have been asking for it on our weekly Rock chat, so we delivered. It’s much easier to use and has some awesome new features. Click here to get your free copy.

The final thing to do is to book in for your Support Package. For you it’s incredibly simple, for us it gives us all the information required to ensure we can help you get ahead. Basically, we’ll send you the Money Manager Tool, book you in for a 10-minute call to chat through how to use it, and then follow up with a 50-minute call to give you the insights that are going to help you get ahead. For more information click here.

The Money Men

Don’t Panic. It’s only March.

Don't Panic. It’s only March.

The markets might be down and it might be a little bit scary, but we’re here to remind you that downturns in markets are just part and parcel of being an investor. This month’s blog is going to explain what a downturn is, what causes them, and what you should do when one occurs. Most importantly we’re going to try to reassure you that it’s nothing to panic about, after all, it’s only March and there’s still a little bit of summer to be enjoyed.

What is a downturn and what causes them?

To summarise it, a downturn is a decline in the economy which generally adversely impacts investments. For a lot of young investors, this downturn will be causing nerves, because it will be the first one they’ve experienced in their time in the market. A few nerves are natural, but understanding what causes a dip, and accepting that they’re a natural part of investing, can help to alleviate the butterflies.

So why does a market dip? The truth is there is very rarely one single reason or clear cut explanation as to why a market turns. More often than not it’s due to a combination of reasons; things like war and other environmental factors, increases in inflation, changes to OCRs, reductions of artificial stimulus and other factors can all contribute.

What all of the above have in common is that they are either based on or generate uncertainty. Uncertainty in turn effectively reduces confidence in the market and the market enters a period of downturn. In the case of the most recent downturn, we think the biggest contributing factors are a high inflation rate that has led to higher than expected interest rates, reduced stimulus from central banks, the political uncertainty stemming from the war in Ukraine, and the ongoing effects of the Omicron outbreak.

So, although it may seem scary when you see your investments are down rest assured that the dip is caused by very real and tangible factors that can be understood and therefore managed.

So what should you do during a downturn?

When trying to figure out what to do in the present a good place to start looking for answers is in the past. Historically investors are fast to react when uncertainty creeps in, but confidence has always returned, and usually quickly, once the initial scare has passed. The reality is markets tend to recover quickly from these types of downturns.

Take COVID-19 as an example; when it first appeared the market spooked, but confidence returned as people realised that life was going to go on. A lot of the people who did panic reacted impulsively and ignored their long term strategies. They did things like shifting their Kiwisavers from growth funds to conservative funds, therefore locking in their losses and missing any potential for a bounce-back off a recovering market (which actually occurred in the same year!)

So, the first and most important thing to do during a downturn is to ask yourself what your investment strategy is. Make yourself pause and consider how long you’re willing to invest for, what you are investing in and the resources you have assigned to those investments. If you’re playing a long term game, and we generally suggest you do, then you need to accept that dips in your investments are always going to be part and parcel of a long term strategy. If you don’t panic and change your strategy the long term growth will usually always exceed the short term losses when viewed over a long enough period.

Just take a look at the bigger picture (literally!)

With new CCCFA rules having landed this is a question we get all the time. If you’re not familiar with what the CCCFA rules are it’s worth reading our previous blog to familiarise yourself as these rules have dramatically changed the bank’s attitudes to lending money.

The banks are now almost forensic in their examination of the accounts and spending habits of people looking to borrow money. The reality is that if you want to borrow money you’ll need to ensure that your bank statements are clean for a minimum of three months. This means reducing any spending that may be seen as frivolous by the bank. Things like takeaways, nights out, retail spending etc will need to be managed tightly before your application to give you the best chance of success.

This level of financial interrogation has seen the number of accepted mortgage applications fall by 25% which has led some experts, including us, to argue that these rules have gone too far and are too invasive and prohibitive to be realistic in the long run. To put it quite simply we don’t think that you should be punished by a bank because you’ve decided to have a three-piece quarter pack after a really tough day at work, especially in an economy that will require consumer spending to keep moving.

1 month view

5 year view

And remember, there are always opportunities

One of the most legendary investors of our times once said in his Chairman’s letter to be “fearful when others are greedy, and greedy when others are fearful.” The meaning behind Warren Buffett’s infamous line has been argued many different ways, but one take is that a period of downturn or instability often presents opportunity. This opportunity arises because otherwise solid investments experience a dip in price due to the downturn in the market giving the savvy investor the chance to build them into their portfolios at a discount.

Take the recent downturn as an example; twelve months ago investors were being “greedy” as they invested in a market on its way up. Now the market has dipped these once “greedy” investors have become “fearful”, and as such the cost of some investments have dipped meaning the canny investor can purchase great investments at a discounted cost.

The danger with this strategy is when people buy with the intention of making a quick buck, we are not advocating this approach at all. Instead, we are arguing that the opportunity exists to buy solid investments with sound track-records that are going to survive the downturn and add long term value to your portfolio.

This strategy makes the most sense when applied alongside Mr Buffet’s most famous quote; “someone’s sitting in the shade today because someone planted a tree a long time ago.” This quote reflects on the value Warren Buffet sees in a long term strategy. So the smartest investors will be those who apply a long term strstegy, rather than looking at share investing as a way to make money quick. At the time of writing, this investor has stuck to his long term strategy while also purchasing additional stocks, at a discount, in some of the largest companies and funds in the world.

Still have a few butterflies?

If you’re still concerned, worried or confused about the recent dip in the market, or if you’re finding yourself tempted to change your investment strategy please just give us a call on 0800 888 482. We’re here to help you get ahead financially, and sometimes all it can take is a chat to lend confidence, a few tweaks to your portfolio or a little more information so you can make the most informed decisions.