The money systems worldwide are closely connected. This means that what's happening in one country can really affect other countries. We've seen this before, like in 2008 when there was a big financial crisis that started in the United States and affected economies all around the world.

More recently, the COVID-19 pandemic messed with the economies and supply chains of almost every country on Earth. Even without big crises, changes in the cost and growth of goods and services can still have a big impact on other parts of finance, like money transfers. Let's explore this further.

What is Inflation?

Inflation is how much the cost of things goes up over time. They usually measure it as a percentage compared to the same time last year. In the US, from 2010 to 2020, the inflation rate ranged from 0.1% to 3.2%. In 2020, on average, prices went up by 1.2%. So, something that cost $100 in 2019 would be about $101.20 in 2020. But in the third week of 2022, the US inflation rate shot up to 8.2%. This big increase is because of national and international issues, made worse by the ongoing epidemic.

What are Interest Rates?

So, the government and central banks use interest rates to control how much money is out there and to help the economy grow. When you borrow money, the bank decides how much interest you have to pay, and usually, it's influenced by the overall interest rate set by the bank. If you're keeping your money in the bank, whether you're saving or investing, the amount the bank pays you depends on the interest rate, too.

Impact of Inflation and Rising Interest Rates

When interest rates go up, borrowing money becomes more expensive. That means you might end up paying more in interest for new loans, and it could be harder to repay what you borrowed. Whether you have a fixed-rate or variable-rate loan can also affect your current loans. If you have money saved in the bank, they pay you interest, but you won't see your savings grow unless the actual interest rate goes up.

When you're planning how to invest, don't forget about inflation. It eats away at your buying power and lowers the actual profits you make from your investments. So, when you want to use your investments, they might not be worth as much. Different kinds of financial stuff can be affected by inflation in different ways.

When inflation goes up, exchange rates can become more unpredictable. This means that sending money internationally might get pricier. If you regularly transfer money abroad, especially in fixed amounts each month, you'll likely see how inflation influences the local currency you receive.

How do you Handle your Finances during Inflation and Rising Interest Rates?

Let’s have a look at some of the tactics to help you handle your finances during inflation and rising interest rates.

1. Recognize your Expenditure and Areas of Spending

When prices go up because of inflation, it's a good idea to check if you need to adjust your spending. Before making any money decisions, give this a go. It'll help you use your money smarter and understand and plan your finances better. Here are some tips for making a simple budget:

• List all your yearly and monthly income and spending, look at your past bank and credit card statements, and use budgeting tools on websites or apps.
• You can also use online calculators in your country or ask your bank or financial advisor for help.
• Don't forget to consider occasional costs, like car repairs, and save some money for unexpected needs, like fixing things around the house.

2. Set Spending Priorities and Create a Budget

Once you know how much you earn and spend, figure out if you have enough saved to cover all your bills. Then, when making your budget, decide which things are most important to you—like rent or mortgage, utilities, groceries, and bills. Check if you can cut costs, and if needed, find cheaper alternatives. Make a priority list for your spending before using the rest of your money. For regular bills, use automatic payments if you can. Always try to live within your means.

3. Take Note of the Various Charges

Some financial products, like bank accounts, credit cards, and life insurance, come with fees. Check if there are any fees that can be reduced or waived, even if you can't avoid all of them. Ask your bank about the costs related to your account. If you have investments like UCITs, regularly check if there are cheaper options by looking at the expenses. It's always good to know and manage the fees associated with your financial stuff.

4. Seek Guidance to Modify your Budget

If you're unsure about what to do with your money during high inflation, talking to a licensed financial advisor can help. They can guide you to make better choices, like adjusting your investment profile or deciding if it's a good idea to cancel your life insurance early. If you're struggling to pay off loans, reach out to your bank or lender as soon as possible. They can help find a solution and might offer debt counseling. It's always good to seek advice when things are uncertain with your finances.

5. Recognize Interest Rates from Central Banks

When central banks raise rates, they try to control high inflation. If you have a variable-rate loan, this means your interest payments might go up. Keep an eye on what central banks announce—it'll help you prepare for any changes in your mortgage payments.

Conclusion

Policymakers use data to predict future inflation, and since it takes time for interest rates to fully affect the economy, interest rates and prices usually move in the same direction but with delays. When inflation goes up, policymakers might raise rates to control it. On the other hand, if the economy is growing slowly, it can reduce inflation and might lead to lower interest rates. Give this article a thorough read to know more about the interlinking between inflation and interest rates.