This post is a round up of a 30-minute Live I did on Linked In about investing as a way to help achieve stability during the cost of living crisis. Plus I’ve added one point I forgot to make there so even if you watched the Live there’s something new!
Firstly, what is the cost of living crisis?
It’s actually two things happening at once but the main driver is the energy crisis.
Inflation
The first thing is the hangover from Covid. Governments poured money into the economies of many countries, for example furlough payouts in the UK and Spain, and stimulus checks in the US. Here’s a country by country report from the IMF which covers 197 economies. Depending on where you were, there were grants to businesses, food distrubution packages, help with household bills – all kinds of free money flowing out of treasuries.
When you’ve got a lot of something, its value does down. When the value of money goes down, its purchasing power falls. As a result you can buy less with it than you could before and that’s called inflation. As a couple of examples, something that cost £100 in the year 2000 would cost you £144 today while last week’s petrol was cheaper than this week’s.
Inflation itself is nothing new. In 1980 in the UK, inflation was 17.99%; in 1990 it spiked again at 9.46% which is about where we are now. (Ordinary inflation would be considered 1-2% a year.) It’s usually driven by government decisions to raise interest rates to encourage people to save, instead of spending or borrowing, in the hopes that demand falls and lowers prices. That has the knock-on effect of making mortgages (and therefore, rents) more expensive which is most people’s biggest monthly expense
On top of this, Covid (and that stuck cargo ship in the Suez canal) led to disruptions in supply chains of everything from computer chips to bikes to the bottles face creams come in. That shortage then also adds to inflation by driving up prices, because demand outstrips supply.
The energy crisis
This time, unlike in the late 70s and early 90s, the rise in inflation is largely due to the increase in energy prices, partly exacerbated by the war in Ukraine. Because we’re dependent on gas, oil and electricity for making, storing and transporting goods, individual commuting and travelling as well as powering and heating our homes, there’s no escape from inflation unless you’re totally self-sufficient living off-grid. (Sounds even more appealing than it used to, doesn’t it?)
But, critically, customers, including businesses who then pass on their costs to customers, can’t do much to reduce their spending on energy bills. So governments increasing interest rates will be less effective at tackling inflation.
Where does investing fit into the cost of living crisis?
In ordinary inflation times, investing keeps you ahead of inflation: your money grows at a higher rate than inflation, as long as you choose the right things to invest in and avoid high fees. The bad news is there are no low-risk investments that will beat the kind of inflation we’re seeing now (though there are a small number of products that are tied to inflation eg US I-bonds).
The good news is that, as the inflation we’re seeing now is tied to current geopolitical events, it will eventually pass and investing will have helped you smooth out the bumpy ride.
Think of it this way, before I mentioned the inflation stats of 1980 and 1990, did you even remember it had been that way? Are there stories told in your family of the terrible times back then? I’m not saying it wasn’t bad, but most people have forgotten about it because these things are cyclical and after a recovery often comes a time of prosperity.
So, what am I doing during the cost of living crisis?
Well, in terms of strategy, my investing plan hasn’t changed. I might be putting lower sums into my investments but I’m not changing the actual structure of my plan. That’s because consistency is key to growing money over time. Constantly reacting to the markets or economic events is disastrous to financial stability.
My investing strategy is broad and diverse already so as to mitigate risk. Therefore some of my investments pay out every month (compared to my stock market holdings which are, of course, down right now but I’m not selling so am not taking any actual losses). This means I have a certain amount of buffer built in.
Any month I think I won’t be able to pay the electricity bill (as IF we are having the gas heating on this year!!) I know I can simply toggle the button within those accounts from “reinvest automatically” to “pay out interest” and use that free income to pay the bills without touching my actual capital.
By the next time another crisis comes around, hopefully my capital will have grown and that income will take care of more than just the electricity bill, should I need it to. That’s one reason why investing is something everyone should be doing with whatever spare pennies they can.
It’s tempting to want to batten down the hatches and hibernate, taking an approach of “if I can just make it through this week/month/year” I’ll think about what I’m doing with my money when we can all come out of hiding. It’s natural that we want to hide when we’re afraid.
But then you’d be missing a huge opportunity to start working towards financial stability.
One more reason why NOW is actually a great time to start investing
This is the part I forgot to mention on the Live last week. Stocks and shares are having a terrible year, meaning most people’s stock market-related investments (and bonds which are also down and typically form a part of most people’s portfolios) are down on paper. I can’t emphasise this enough: stocks and shares are only actual losses if you sell when they’re down.
Pensions, which you can’t access until you retire so can’t sell now, are linked to the stock market so those are down too. Seeing that adds to the feeling all is doomed.
Again, this is a normal, cyclical thing and the key is to understand that and know what to do, which is why something like my course is essential for helping you to avoid the panic and mistakes that will lose you actual money.
So, counter-intuitively, now is a good time to start investing because prices are low so it’s like shopping at the sales.
When the recovery comes, you’ll reap the benefits. Now is the ideal time to learn about investing as you’ll aquire the knowledge and tools to grow money, some of which will help you right now and some of which will pay off over time.
The key to it is understanding investing and seeing that it’s not that complicated, time-consuming or scary once you understand risk, the stock market and a few basic principles. Investing is NOT trading; buying and selling shares for a quick profit (or more likely a quick loss!) is not what I teach. More info on what I DO teach here.
Think of this crisis as a time for change. Are you ready to change the way you manage your money so you can achieve more financial stability whatever is going on around you?
My next course starts November. Don’t miss it!