The sky-high cost of food and fuel is putting the financial wellbeing of families under pressure all over Ireland. For many, the surging cost of heating a home this winter is set to balloon by thousands of Euro. It means many people will be faced with having to make a lot of very difficult budgeting decisions in the months ahead.
Where they may not have done so, the tried and tested way of overcoming a financial shock is to have a reserve prepared. This can be done any number of ways, but all require some amount of money.
For example, an emergency fund is a tried and tested means of weathering a life event, including loss of employment, illness and even today, inflation.
Typically, an emergency fund should be the equivalent of at least 3 – 6 months’ worth of day-to-day living costs. So, if someone lost a job, the household could continue to operate at a normal rate until a new job is secured.
Inflation is, in many ways a reverse-form of income loss. Except instead of losing income, the earner is losing buying power. As prices rise, the buying power of every euro falls. If inflation rises to 10%, the buying power of each euro falls by a similar amount. So, in effect, across Ireland, with inflation surging to over 9% so far this year, it’s the same as income falling by a similar level.
The reason households are urged to save for an emergency is that it offers them financial resilience. It also allows them to continue with some level of financial and social normality. Events will change, inflation will eventually be tamed and family budgets will eventually become more predictable again.
For now, though, examination of a household budget is an essential first step to staying ahead of inflation sticker shock.
Some practical steps:
While every household will be different, some practical approaches to dealing with the current rate of inflation and protecting one’s financial wellbeing include:
- Use a Budgeting Buddy to guide your financial review.
- Examine possible refunds from Revenue
- Question spending behaviours.
- Shop the market for any possible savings on mortgage switching, insurance costs and much more.
Life events can strike most households. Inflation is just another example of a life event. So was the Covid pandemic. Climate change is an ever-present one. The 2008 Credit Crunch and global recession was another. Such challenges will come and go. Therefore, it is so important Irish households learn to include planning for such events as part of their long-term financial wellbeing strategy.