Inflation has become a common topic of discussion over the past few years, and understanding its effects on your finances is more important than ever. Simply put, inflation refers to the general rise in prices over time, which results in the decreased purchasing power of money. Inflation rates indicate how much value investments lose and how much prices increase over time.

For example, as announced by the Central Bank in November, Egypt's inflation rate dropped slightly in October 2024 to 24.4% compared to 25% in September. While inflation impacts the broader economy, it also significantly affects your money and savings.

What is Inflation?

In simple terms, inflation occurs when prices increase, causing the value of money to decrease. For instance, the money you have today might buy fewer goods and services compared to a few years ago. Think back to when you were younger and could purchase more with the same amount of money — that’s inflation in action.

While inflation can have some economic benefits, it also has downsides. High inflation can significantly reduce the purchasing power of individuals and even lead to an economic recession if not managed properly.

It’s important to note that not every sudden price increase qualifies as inflation. For example, if fuel prices rise due to global supply issues or new taxes are introduced, these are one-off events unless they lead to continuous wage and cost increases. Similarly, an increase in the price of one product is not necessarily inflation but maybe a relative price shift.

Inflation, at its core, is closely tied to the growth of the money supply. It happens when there’s more money circulating in the economy than there are goods and services available. This results in higher prices as more cash competes for fewer products.

What Causes Inflation?

The primary cause of inflation is the increase in the money supply. This can occur through various mechanisms, often influenced by monetary authorities or governments. Some common methods include:

• Printing more money and distributing it among the population.
• Devaluing the currency through official policies makes each unit of money worth less.
• Creating new money through credit is often seen when governments buy bonds from banks, injecting cash into the economy indirectly.

Is Inflation the Same as Recession?

While both inflation and recession significantly impact the economy, they are fundamentally different concepts. Here's a clear comparison:

How Does Inflation Affect Your Savings?

Imagine you’ve saved EGP100 and put it in a piggy bank for a few years. When you check later, the EGP100 is still there, but its purchasing power has diminished. Due to inflation, prices increase, and the value of money, its purchasing power decreases.

In perspective, it’s like opening your piggy bank and finding only EGP50 instead of EGP100. That’s the effect of inflation on your savings. Similarly, saving your money in a low-interest savings account with a return rate below inflation means you’re effectively losing value over time. For example:

• If inflation averages 6% annually over 5 years, your savings of EGP 1,000 could lose approximately EGP 243 in purchasing power.
• If inflation averages 8% annually over 5 years, the loss increases to about EGP 311.

This is why protecting your savings from inflation is crucial. Unfortunately, many people remain unaware of inflation's impact, especially since inflation rates have been relatively low for the past 30 years. Even more surprising, many savers don’t realize inflation poses a problem!

Top Tips for Dealing with Inflation

Inflation and its effects can put significant pressure on your budget, and it might even make you worried about your savings since the money you saved loses its value. But don’t worry! Here are some essential tips you can follow to minimize inflation's impact on your financial situation:

Identify Inflation's Impact on You

Financial advisors recommend comparing your spending over the last 4 months of 2023 with your spending over the last 4 months of 2024. Since each person’s financial situation is unique, inflation affects people in different ways. By doing this, you'll be able to see if you’re spending more than before and identify how inflation is affecting your finances.

Create a Monthly Budget

Once you fully understand inflation's impact on you, it's time to assess your entire monthly budget. What is your monthly after-tax income, and how has it changed compared to your expenses? If you're spending significantly more on the same things while your income remains the same, it will be helpful to create a personal money management budget. This way, you can keep up with rising prices and reduce the losses affecting your monthly income.

Find Ways to Cut Expenses

There are immediate steps you can take to reduce your monthly costs. For instance, you can lower your mobile phone bill by cutting down on unnecessary internet and call services. If you have Wi-Fi both at home and at work, you don't need unlimited mobile internet at a high cost. Also, review any automatic subscriptions withdrawing from your bank account monthly, or negotiate for a better rate on your car insurance.

Save on Meal Costs

One of the best ways to combat inflation is by saving on your monthly grocery bills. You can plan your meals ahead of time based on your schedule, prepare shopping lists, and look for discounts on products. Cooking in bulk every few days can also reduce your need for frequent supermarket trips or ordering ready-made food, thus saving more in the long run.

Consider a Side Job

Everyone's situation is different, but if you have time and space in your life to start a side hustle, now is the perfect time. Think about the unique skills you have and how you can leverage them! You could freelance or, if you have expertise in writing, art, or any other field, you can offer lessons to younger age groups or people looking to learn these skills. This way, you can generate additional income and improve your financial position.

Think About Long-Term Investments

Investing in a diversified portfolio of stocks and bonds can give you a better chance to outpace inflation and build wealth over time. Stocks, historically, have provided strong returns that outshine inflation by a significant margin. The key is to balance your portfolio between stocks and bonds to help you achieve your long-term investment goals.

Think of bonds to provide income and secure your portfolio during stock market downturns. On the other hand, stocks are the growth engine for your portfolio, and the more stocks you hold, the more potential for long-term returns, though with an increased level of risk.

If you're interested in learning more about both short-term and long-term investments, check out this article

Protect Your Savings with Money Fellows

Money Fellows offers a smart solution to safeguard your savings from the impact of inflation. Through organized and secure money circles, you can save consistently and receive a lump sum that allows you to invest in assets like gold or real estate to preserve your money's value.

All transactions are secure and supervised by the Central Bank of Egypt, ensuring your savings are well-protected in the face of inflation challenges.

In conclusion, it might be time to review your savings and assess whether they’re keeping up with inflation. If you find that their value is decreasing over time, consider following the tips above. If you choose to invest in stocks and mutual funds, it could be a great solution to increase the value of your money in the long run.