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September 14, 2017 | By: Kerri Barreca

5 Financial Planning Tips to Combat Inflation

Money Management

“Why, in my day, bus fare cost only a dime!” You may have heard similar statements from someone baffled by the effects of inflation. Every time I see TTC and transit costs rising, or the price of milk go up I think of what it used to cost and can’t help but feel a little older. Gosh, I remember being able to use a pay phone for a quarter. Imagine my shock when I actually needed to use one and it cost a staggering 35 cents. Who carries around an emergency dime? Sheesh!

The Truth About Inflation

According to the Bank of Canada’s inflation calculator, something that cost $100 a hundred years ago back in 1917 would likely cost about $1,752.70 today. The Ford model T car, for instance, was introduced for a price of $850 USD and later sold for $260 USD. Good luck finding a new car for that price today! And inflation doesn’t seem to be slowing down anytime soon either, so let’s take a look at a few things we can do to help deal with the increased cost of living.

Combat Inflation

  • Make sure interest earned > inflation rate: When investing and saving your money, be sure that interest and capital gains are higher than inflation. You wouldn’t want to end up retiring with a savings amount that would be enough for 2017 but will surely not be enough by 2050. 

  • Save for future costs, not current costs: Let’s imagine Suzy Saver wants to retire in 30 years. If her current living expenses cost about $1,500 a month, that’s $18,000 annually. If she expects to live to age 75 and retire at age 65, that’s 10 years of savings that she’ll need, so about $180,000. If we take into account help from Canada Pension Plan (CPP), perhaps another pension (if Suzy if lucky), plus the hope that her expenses will be less during retirement less transportation costs, her mortgage will be paid off, etc.she will need to save at least $90,000 in her RRSP. However, $90,000 will not go as far in the year 2047 as it does today. If the rate of inflation is 2.5% annually, that means Suzy should actually be saving about $188,781 to keep the same standard of living she enjoys today. 

  • Overshoot your savings: But what if inflation is closer to 3.5% rather than 2.5%?  What if Suzy lives to age 85 instead of 75? Well, she better start saving in her RRSP just to be sure. It’s always better to have too much than not enough, especially when you retire. If you can save more, do it!

  • Renters entitled to interest on security deposit: Increases in the cost of living also affects renters. Like clockwork, every year I get the notice from my landlord that rent will be increasing in the next few months. Landlords in Toronto must follow the guidelines of the Landlord and Tenant Board. This year, rent can be raised to a maximum of 1.5% of the current price, based on the Ontario Consumer Price Index. To help compensate for this (at least a little) be aware that if you paid a security deposit, you are entitled to 1.5% interest on that deposit annually.   

  • When inflation goes up, ask for a raise: Of course the cost of food, gas and clothing is bound to go up too. Be sure that your employer adjusts your pay periodically to reflect increases in costs of living. If it’s been awhile since you’ve seen a pay increase, it may be worth bringing it up with your employer. 

The rate at which our living costs rise is based on economic factors, like job availability and the housing market. If moving to a community where the cost of living is lower is not an option for you, be sure to keep tabs on the suggestions above so that inflation doesn’t get the best of your budget. And if you want advice that’s more specific to you, your budget and your future goals and financial planning, contact us today to learn more. All of our counselling is free!

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