Written by: Edith Belmont
Inflation is an economic disease that wreaks havoc on the economy, business, and threatens to pulverize the value of our money. The problem is that it harms more those who do not know or cannot protect themselves from it.
In my articles in past issues, I have been warning you that inflation is a problem that we will face as a consequence (amongst other factors) of the enormous injection of liquidity that Central Banks and Governments of large countries (such as the United States, European Union, Japan, England, among others) have subjected their economies and that have caused those same Governments, Corporations, Companies, and Families worldwide, to accumulate high levels of indebtedness.
The problem with inflation is that it will not be temporary, and it will exceed official projections in the upcoming months.
In Mexico, the inflation target for 2021 according to “Banco de México” was between 3 and 3.5%, which was in line with the Ministry of Finance with 3% according to the Federation’s Expenditure budget (PPEF) for 2021.
However, as of today that I write these lines (October 7), INEGI announced that consumer inflation (annual variation, from September 2020 to September 2021), increased above the expectations of the experts: 6.0% In other words, inflation so far has already doubled above both official and expert expectations. This will have repercussions in an increase in interest rates, and this is where the problems are unleashed.
What to do to get less scraped? How to protect ourselves from the impact of inflation?
We commented at the beginning of these lines that: “It hurts more those who do not know or cannot protect themselves from it.” or as Fred Hirsh and Jhon Goldtborpe said in their book “The Political Economy of Inflation”: “The costs of adjusting over adjusting to inflation are more serious in the case of the less intelligent, the less educated and the elderly … they are these people, who in general tend to be in low-income levels, those who bear the greatest economic psychological cost when trying to face inflation … The richest have a greater capacity to adjust their assets and protect their wealth”.
Well, here are some basic recommendations that we must take into account. I do not intend to discover the black thread or take out the magic wand, they are some common sense advice that sometimes because we are so involved in our activities, we miss it. The recommendations for small businessmen, merchants, housewives, and for the common man who does not have large investments or large assets is to protect their assets. Ordinary citizens like me, who live from day to day and suffer the consequences of higher inflation.
First, it is very important to keep our level of indebtedness at bay.
Have credit cards under control, if it is possible, pay them off as soon as possible since, in times of inflation, those are the ones that usually have the highest interest rate.
If our business lives or needs credit, get one at a fixed rate with a short-term period (maximum three years). Right now the fixed rate may seem expensive, but it is like buying protection insurance. Well, when this inflationary bubble passes, interest rates will tend to fall again, and if we keep the rate fixed for a long time, now, it could be very expensive.
Second, if we have already obtained a loan or have liquidity, use it to reinvest in the business, invest in what it gives us for everything else. One strategy is to prevent ourselves and have inventory. Why? Because of the continuous increase in costs (derived from high inflation) and the increasing prices of raw materials and components, sooner or later it will be reflected in consumer prices. For this reason, it is wise to accumulate inventory.
Third, do not fall into the marketing trap of large corporations and department stores that offer easily accessible credits, small payments, or fixed payments that may seem comfortable for the small ones, but if they do accounts, the total amount they end up paying can reach up to 50 or 100% more than its cash price value. Remember that “Small payments hide large debts.”
If you decide to choose to buy or obtain credit under this scheme, take into account at least these conditions:
1. If they offer you “interest-free months”, check that the cash price is taken as a reference to defer it (divide it) to the months that the promotion includes.
2. Another alternative may be to purchase that good or service with a credit card. In that case, use the card with the lowest CAT (Total Annual Cost). The one that offers you the best rate. Consider that the credit card can be a better option than small payments if it is used in an intelligent way avoiding, of course, paying only the minimum required because, when misused, they become a snowball that ends up crushing us.
3. Having an emergency savings fund is very useful without having to sacrifice or compromise the future income.
Finally, and speaking of having savings funds, when saving or investing your money, avoid falling and being deceived by the “great and wonderful investments” that offer returns well above inflation and with returns on capital in short periods. Many of these large investments are frauds. They are people who detect a need in people who desperately seek to obtain high returns.
We refer to “pyramid” type schemes (for example). They are mechanisms in which the profits obtained by the first investors come from the resources that are contributed by new clients. Therefore, for a system of this nature to be sustained, it is necessary to attract money flows from new investors. However, saving in these types of schemes or investing in the so-called “pyramids” can put you at risk of losing all your money and assets.
So to protect the money you have to invest or save in a formal institution such as banks, savings banks, or any other authorized and supervised instrument since, apart from giving you the option of accessing other financial services such as loans and insurance, it earns interest, and your money will be protected. If you are going to entrust your money to an institution, verify that it is duly authorized and regulated by the authorities and that it has deposit insurance. That they offer you a product with a higher interest rate and charge fewer commissions.
Remember that you have to doubt those entities, investments, or people that offer quick and easy money, with returns well above what the market offers because they are usually traps, traps in which we fall out of desperation, because we are not well-informed, because not preparing and acting in advance of events, for not being vaccinated against one of the main evils that afflict the economics of our country: inflation.