The Two I's to Know For a Recession

As we head into a recession, it's crucial to understand the inner workings of inflation and interest as these two financial metrics go to war with each other during these periods of time and influence our spending power. This quick guide will clear up how they work individually and react to each other.

Before diving in a quick disclaimer - I'M NOT A FINANCIAL ADVISOR. The advice given below are suggestions only and should not drive any financial decisions your end. Always review your own situation, research multiple accredited resources and seek financial advice where required from a trained professional.

To kick off, lets l start with the more dominant of the two right now - Inflation.

Inflation

Inflation is the measure of how much more expensive goods and services has become over a certain period, usually a year.

The value of inflation is established from household surveys conducted by the government. As you would expect, the higher this figure get, the less you can get with your money.

Inflation rises due to:

• Supply/demand
• Lax money policies
• Public expectations of price rises

Governments will counter rises in inflation with our second metric - Interest (more on that shortly), which is logical as money will be more likely saved with rising costs as opposed to spent.

Is there anything you can do? Yes. You can invest in the stock market (which keeps up with inflation),continue to increase your income streams and save where you can.

Interest

Interest is the price payed to borrow money, the cost charge to lend money or growth rate of a savings account. Interest is most often reflected as an annual percentage of the amount of a loan or savings pot.

As you can tell from the above definition interest can be a blessing or curse. Save money in an account and you’ll make interest. Loan money however and you’ll be charged interest on top of the amount you loan out.

You will also need to consider the interest rate, which is defined by the banking system of a given country and heavily influenced by government policy.

Low interest scenarios may be considered as less suited to saving money and a good opportunity for say a business loan. Bank debt repayments are also less severe.

High interest is the inverse of the above and is what we’re heading towards with the signs of a recession setting in.UK interest is on course for 3% by year end.

For me, I would advise the following:

• When interest is high, take advantage by saving money and look to take out your high interest debt whilst avoiding taking on new high interest loans.
• When interest is low, continue to save where possible but know that there may be opportunities to gain cheap loans that could unlock your income potential. Just make sure you can pay what you owe if you choose this route.

Want More?

If the above has been of benefit to you and you wish to learn more about potential income streams you could adopt or ways of saving money, then consider looking at the Money Magic Blog on its various platforms HERE.

New posts are added daily across all platforms with the intension of building a reliable source of financial education for all. This goal is of course not possible without your help so feel free to feedback here and across all of our platforms.

Thank you for reading and I look forward to sharing more financial wisdom with you in the future.

G