Stagnant Wages and Declining Purchasing Power? Here’s How to Manage Your Finances During Deflation

The prolonged deflation issue gripping the country has become a major discussion lately. In September 2024, the Central Statistics Agency (BPS) reported a deflation rate of 0.12% month-on-month, marking five consecutive months of price declines. Deflation refers to a situation where the prices of goods and services consistently drop, resulting in an increase in the value of money.

While this may seem like positive news at first glance, deflation can actually bring serious consequences for the economy if not properly addressed. Prolonged price reductions are often accompanied by a decrease in production, shrinking job opportunities, and a drop in people’s purchasing power.

According to Riza Annisa Pujarama from the Institute for Development of Economics and Finance (INDEF), the decline in purchasing power is becoming increasingly apparent. In the first quarter of 2024, household consumption grew by only 4.91%, lower than the overall economic growth rate of 5.11%. One of the main causes is stagnant incomes among the middle class, making it difficult for them to keep up with economic changes.

Additionally, a BPS report revealed that by the end of August 2024, the number of middle-class Indonesians had been steadily decreasing over the past five years. This year, the middle-class population was recorded at 47.85 million, a drop from 57.33 million in 2019.

These statistics highlight that a large portion of the population is facing increasing economic pressures. In the face of weakening purchasing power and stagnant incomes, it’s crucial to adjust personal financial management strategies to cope with these economic challenges. This includes being more meticulous in planning expenditures to better prepare for future uncertainties.

How to Manage Finances During Deflation

In times of deflation, adjusting your financial strategy is crucial. Even though prices may drop, economic uncertainty often leads people to hold off on spending and focus on increasing their savings. During such periods, having a stable income can still be challenging, as some expenses, like electricity bills or medical needs, can't be reduced much.

Additionally, deflation often signals a weakening economy, so it's important to be cautious with your spending and ensure your finances remain stable. Here are a few tips to help you manage your money effectively during deflation.

Tip 1: Prioritize Essential Expenses

The first step in navigating deflation is to prioritize your spending. Identify essential needs, such as household bills, regular payments, and healthcare, and distinguish them from discretionary spending. Focus on covering your basic needs first.

Set up a budget that highlights your essential expenses, while non-essential purchases can be delayed or scaled back. You can also use free digital budgeting apps to easily manage your cash flow. This will help you keep your finances under control and maintain liquidity

Tip 2: Be Cautious with Big Purchases

Even though prices may fall during deflation, resist the temptation to make large, unnecessary purchases. It's a common pitfall that leads people to overspend just because items seem cheaper.

Reconsider whether you truly need the item immediately. A better option might be to set aside funds gradually and make the purchase when the economy stabilizes. Take advantage of money management tools in your banking app to make this process easier.

Tip 3: Make Smart Use of Discounts and Promotions

During deflation, as purchasing power declines, many sellers offer discounts and promotions to attract customers, especially on online platforms. This is a great opportunity to get what you need at a lower price, but it’s important to shop wisely.

Make a list of priority purchases and avoid impulsive buying. Choose payment methods that offer the best benefits for your needs. This approach will help you take advantage of lower prices without sacrificing your savings or budget.

Tip 4: Increase Your Emergency Savings

In times of economic uncertainty, it's crucial to boost your emergency savings. Unexpected situations, such as job loss or reduced income, can happen anytime, especially when the economy is sluggish.

Allocate a portion of your income to build up emergency savings, ensuring you have enough financial reserves to last for an extended period. Ideally, your emergency fund should cover 6 to 12 months of living expenses.

Tip 5: Pay Off High-Interest Debt

As purchasing power declines, it's essential to pay off debt, especially high-interest ones, to reduce your financial burden. When purchasing power weakens, unpaid debts can snowball, with interest accumulating quickly, making it harder to pay off.

If you have credit card debt or or other high-interest loans, aim to pay them off as soon as possible to ease financial pressure. Eliminating high-interest debt will lower your monthly expenses and help you maintain financial stability. Keeping expenses low is key to managing during deflation.

Tip 6: Review and Diversify Your Investments

Managing investments during deflation requires caution. Deflation often signals economic uncertainty, which can affect the stock market and other assets.

Review your investment portfolio and ensure it’s diversified. Avoid placing all your money in one type of asset, as economic volatility could negatively impact certain investments. By diversifying, you can spread the risk and safeguard your assets in the long run.

Deflation and weakening purchasing power may seem daunting, but with the right approach, you can effectively manage your finances. The key is to stay calm, avoid rash decisions, and continuously adapt your financial strategy as economic conditions evolve.