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Co-CEO, leading GrowthApril 29, 2024

How does inflation affect your income?

Inflation affects personal income in Nigeria by reducing purchasing power, shrinking savings, and making debt repayments harder. It also raises the cost of essentials such as food, transportation, and utilities. To navigate these challenges, individuals can track expenses, budget wisely, explore cost-saving alternatives, invest to protect savings from inflation, and consider ways to increase income.

How does inflation affect your income?

Imagine a N1,000 note in your hand. Now imagine being able to buy less and less with that N1000 every month. That's the harsh reality of inflation, and in Nigeria, it's a growing concern, reaching 33.20% in March 2024 from 31.70% in February 2024 according to the Consumer Price Index (CPI) report released by the National Bureau of Statistics.

If you’re among many who are wondering how inflation affects your income and what you can do about it, this blog is for you. Come along as we “delve” into the impact of inflation on your income and practical tips to enable you better navigate these challenging economic times.

How rising prices shrink your income

Inflation, in simple terms, is a generally considered as a sustained increase in the general price level of goods and services in an economy. Imagine, for example, that a basket of groceries you used to buy for N10,000 now costs N12,000, while you income remains the same. What this does is reduce your “purchasing power” or affects how much more tomatoes you can buy given the same income.

The National Bureau of Statistics (NBS) reported Nigeria's inflation rate to have reached a 17-year high of 18.12% in March 2021.  This means that on average, prices of goods and services increased by 18.12% compared to the year before.

But inflation isn't just a number; it has real-world consequences for Nigerians. Let's look at some specific examples:

  • Essentials Hit Hardest: Basic necessities like food, transportation, and utilities are often the first to be affected by inflation. A bag of rice that cost N5000 last year might now cost N7000, forcing households to make difficult choices about what they can afford.
  • Shrinking Savings: If you've saved some money, inflation can eat away at its value over time. The N100,000 you saved last year might not buy you the same amount of groceries a year later due to rising prices.
  • Debt Becomes Heavier: If you have existing loans or mortgages, inflation can make them more difficult to pay back. The fixed monthly payment you used to make represents a larger chunk of your income as the value of your Naira decreases.

Practical Tips to Navigate Rising Inflation

As inflation continues to rise, it is important to adjust adequately with it. Here are some practical tips to help you manage your finances and navigate rising inflation:

  • Track Your Expenses: Knowing where your money goes is the first step to making informed decisions. Track your spending for a month to identify areas where you can cut back.
  • Embrace Budgeting: Create a realistic budget and stick to it. Allocate funds for essential expenses like rent and food, and set aside some savings if possible.
  • Explore Cost-Saving Alternatives: Look for cheaper options for groceries, utilities, or transportation. Consider cooking at home more often or switching to public transport from private vehicles.
  • Invest Wisely: Explore investment options that can potentially outpace inflation and protect the value of your savings. Depending on your risk appetite and financial goals, you may want to consider saving in dollar-denominated assets like stocks and mutual funds or explore fixed deposits and real estate investments.
  • Increase Your Income: This might not be an immediate option for everyone, but consider ways to boost your income. Explore additional work opportunities or consider up-skilling as a way to to open doors to higher-paying jobs.

Remember, inflation is a complex issue, but by understanding its impact and employing smart financial strategies, you can be better equipped to weather these challenging economic times. Keep yourself updated on economic news and government policies that might impact inflation and your finances.