When life gets a little out of hand, we might say that things are blowing up! Sometimes it comes out of the blue, and other times we can see it coming, but generally, when we look back at how events unfolded, there were signs of a crisis looming. Inflation is much the same; it’s happening all the time, but every now and then, we suddenly feel the effects. Just like the aging process, it happens slowly and then all at once!

Inflation is a measure of how much more expensive things are getting. And, as we know, things just keep getting more expensive, which is why we cannot afford (literally) to under-inflate, or overlook, the effects of inflation on our financial planning.

As always, when it comes to money, we have two choices: earn more or learn to work with what we have. Whilst we can always explore ways to generate more income, it’s not always possible, which is why it’s so important to remain connected and engaged with our financial plan.

In a recent blog from the team at 22seven, they offered a few ways to address inflation head-on and adjust our financial planning as needed.

Planning

Planning is key to cutting costs and being budget-savvy. Let’s use fuel as an example. By planning ahead, you can save on fuel by driving when traffic isn’t as hectic, going to the grocery store closest to your home or office, or making sure you only make one or two trips a day by writing down all your errands and plotting a strategic route. Many people also realise the benefits of having groceries delivered, finding that they spend less on fuel, save time and spend less on unnecessary items.

Change the way you buy

The first step is to overcome brand loyalty. You might need to look for cheaper alternatives or buy in bulk to cut costs. As economies adjust to the war in Ukraine and inflation at a 40-year high in America, prices are likely to keep rising. 

Cut back on costs you don’t need

It’s sad but true – some expenses will have to leave the building. Rethink your streaming subscriptions and other non-essential expenses. Learning to live more frugally might be what gets you through. 

Keep on investing 

It might seem counterintuitive to put away some of your hard-earned money when you’re already anxious about cash flow, but investing will ultimately grow your wealth, even if it means that you have to sacrifice certain small pleasures right now. 

At the end of the day, keeping the ship afloat means keeping it balanced. Talk about your financial situation with your family and friends so that they can help and support you. Sometimes it’s as simple as knowing that you can’t eat out as often, or perhaps your regular holiday plans need to be pushed back or changed to something more cost-conscious.

Whatever you do, don’t underestimate the effects of inflation, especially when they’re higher than expected, and you see your monthly budget being worth considerably less.

We need to be strategic about growth and not just hope it will happen organically. Through a recent interaction with business coach Grant Newland, the importance of this was brought to the fore of our conversation. But it is not just about growing businesses; it’s about developing people, families, and communities.

It’s easy to think that growth will ‘just happen’ organically, but if we don’t have a growth mindset, it probably won’t happen at all. Change happens organically, but not growth, and change can mean many different things. Dave and Hester Vaughan, business and life coaches at Lifestyle Coach, often say that we need to go through a process of construction, deconstruction and reconstruction. This process helps create a high-level view of what a growth journey could look like.

But what does that look like on a practical level? How can we start ensuring that we’re on a growth path? 

Newland suggests that we simplify this process by looking at what’s holding us back and focusing on fixing those things. We articulate the problems, blindspots, biases or stumbling blocks, and then we take action to address them (construction, deconstruction and reconstruction). 

In short, we articulate and act.

Understanding this is the first step; putting it into action often requires guidance, help and accountability – which is why advisers, coaches and mentors play such a vital role in our growth journey. In reality, when it’s your life, family or business, you will probably find many things that need fixing.

In the journey of articulating what’s holding us back, we need to perform a sort of triage where we identify what we need to address and work with first. The whole point of deconstruction and reconstruction is so that we can build back better. We need to deep dive and do what many coaches call “the hard work”. But, if we try to fix multiple projects simultaneously, we can become overwhelmed and ineffective.

James Clear, the author of Atomic Habits, said, “Choosing the priority is as important as working on it.”

Creating an effective, life-changing plan involves articulating what needs to be done and then putting it into action, whether it’s a business, life, financial, or any other plan. If we don’t, we will not see the growth we hoped for, and we will be in exactly the same place a year, two, three or five from now.

“Do as I say… not as I do.” This has been a popular phrase for many, many years. In fact, it was first recorded in John Selden’s Table-Talk in the 17th century. Possibly, for as long as we’ve had structured societies, we’ve noticed a disconnect between what we say and what we do.

In the 19th century, this recorded awareness grew with books such as MacKay’s Extraordinary Popular Delusions and the Madness of Crowds, which show how group behaviour and psychology affect us. Still, it was only since the 20th century that we started matching this up with financial planning and how our behaviours often override our intentions. 

Behavioural finance is the study of the effects of psychology on both investors and financial markets. It aims to identify and understand why people make certain decisions based on their biases and irrational thoughts. We could have all the head knowledge and say the right things, but if we’re stressed, feeling vulnerable, insecure or inadequate, we may act in the opposite way, and our actions will not reflect our words.

“It’s understated to say that financial health affects mental and physical health and vice versa. It’s just a circular thing that happens,” said Dr Carolyn McClanahan, founder & director of Life Planning Partners Inc. “When people are under stress because of finances, they release chemicals called catecholamines.” 

Catecholamines (dopamine, norepinephrine, and epinephrine) are hormones made by our adrenal glands, two small glands located above our kidneys. These hormones are released into the body in response to physical or emotional stress. When we make bad financial decisions, our health will suffer.

Over the long term, these affect our mental health and ability to think clearly, impacting our physical health, wearing us out and making us tired. Lack of sleep, poor health and mental state mean we will be vulnerable to making unhealthy decisions in every area of life, not just in our finances.

Behavioural finance can help us understand our own biases and recognise them when they arise. It can also help us engage in conversations that are kinder, more intuitive to the cause of our financial stresses and lead to practical ways to “walk the talk”.

This is why personal financial planning is such a powerful practice in helping us apply broad-based intellectual knowledge to our unique situations in a way that makes sense and can be implemented in our daily lives. We can cultivate healthy habits that reflect our heartfelt intentions.

Diversification is not just an approach to adopt during market volatility; it’s generally good practice. And, if you want to create a portfolio that mitigates risk and beats inflation, diversification offers one of the best ways to increase your portfolio growth and amplify your savings.

There’s no single “correct” way to diversify your investment portfolio. The overriding principle is to mix assets and classes in a way that helps minimise risk while achieving a higher rate of return. Some people prefer to invest in stocks, bonds or equities because they offer different rates of return and provide compensation for losses in one asset class. But in recent years, ESGs and other alternatives have arisen to provide investors with non-market-correlated vehicles.

The best way to diversify and amplify your portfolio is to work with your personal financial adviser, but here are some popular thoughts around diversification.

Often, the best way to diversify your portfolio is by purchasing a mixture of investments of different types. A diversified portfolio generally has no more than fifteen to thirty various assets, and stocks should be spread across several different industries. Bonds, index funds, and savings accounts are also common and should be part of your overall portfolio. Depending on your personal investment goals, you may consider investing in real estate. This way, you will have a more comprehensive selection of investment opportunities.

Diversification in investing helps minimise risk. Investing in various assets reduces your risk by spreading your money across many investments. For example, investing in multiple areas, countries, and industries is an excellent way to mitigate the risk of one investment going down. Diversification also allows you to balance your investments and reach your financial goals without being swept away by one particular investment’s volatility. For example, if one investment loses ten or even twenty per cent of its value (as we’ve seen many times over the short term), you will still have other funds to fall back on.

It also helps minimise risk by spreading your investment portfolio across different asset classes (not just different assets within the same class). With a balanced portfolio, you’ll benefit from a lower risk profile, and you’ll be better positioned to withstand the inevitable downturns while enjoying increased returns when you diversify.

The idea of investing in various stocks is to spread your investment risk across different industries. Large companies often perform better than smaller ones, and smaller companies, on the other hand, have more volatility. By distributing your investments across different industries, you balance the risk of a volatile industry while maximising your chances of earning a steady income. In addition, diversification can reduce the risk of liability due to an industry crash. It’s important to remember that investing in different industries does not guarantee total financial safety.

Diversification means holding a variety of assets. Depending on the current economic situation and the sentiment of the markets, a diversified portfolio will behave differently. It’s healthy to keep a long-term view on your investment horizon and prepare for steady growth – lottery winners grow rich overnight, but prudent investors grow wealthy over time.

“The only way to find permanent joy is by embracing the fact that nothing is permanent.” – Martha Beck.

Over the last few decades, investment strategies have developed and evolved to move away from market-related benchmarks toward personal goals and outcomes. Modern investors are now creating plans that are more personalised and unique than ever before. The marketplace is innovating to provide models, funds and alternatives to whet even the most exclusive investment appetites.

However, even though we’ve tailored the investment goalposts to our individualised needs and expectations, external factors still play a role in how we plan and anticipate the future and the goalposts keep moving.

As a world-renowned author and life coach, Martha Beck reminds us that we need to become comfortable with constant impermanence. And whilst this can seem like an easy concept to embrace, when we see our investments drop or something happens to upset our plans, we can allow it to rob us of our joy.

We might be on a promotional track at work, attending training and putting in extra hours of study and upskilling, only to have our dreams crushed when our company can no longer stay afloat. External factors, beyond our control, will always impact where the goalposts are placed.

Most of us accept that life is not about ticking off milestones, but because our schools, companies, religious institutions and governments hold onto these models of conditioning and measurement, it’s hardwired into us to create expectations and anticipate them to be permanent.

Every day we need to embrace that nothing is permanent and that our joy in life is about so much more than a timeline playing out according to a plan. Life coaching is all about creating and promoting well-being to attain greater fulfilment through improving relationships, careers, and our day-to-day lives. The first relationship is the one we have with ourselves, and this is where we begin to find a robust and powerful joy.

It’s also found at the heart of a financial plan centred on us and not on markets or benchmarks set by others. This resilience that we are seeing is increasingly essential to succeed and persevere in our current social, political and economic environment. When the goalposts keep moving, we need to become as centred and grounded as possible so as not to be disillusioned and unsettled when we embrace that nothing is permanent.