Inflation is here and we are feeling it — at the grocery store, the car dealership, the gas pump, and in our housing costs. It is frustrating to shell out more cash for the same products, but there are a few actions you can take to ensure that you are keeping your finances on track when it feels like prices are out of control.
What is inflation?
Inflation is a broad increase in the prices of goods and services across the economy that results in reduced purchasing power. In other words, you pay more money for the same groceries, cars, and haircuts.
What is causing inflation?
The inflation we’re experiencing today mainly comes down to supply and demand. COVID interrupted supply chains around the world making it slower and more expensive to produce goods. While the pandemic took a financial toll on many people, those fortunate enough to keep their jobs and work from home were able to stockpile more cash. As the world has opened up, those people have more money to spend on goods and services.
How to deal with inflation
Adjust your budget: The reality of inflation is that your day-to-day expenses will be higher and it will affect your budget. To stay within your budget, you may need to cut back on discretionary expenses like dining out and entertainment to offset increases in non-discretionary expenses like housing and groceries. Alternatively, if you have yet to dial in your grocery budget, now is the time to learn how to shop sales and maybe opt for the store brands, rather than brand names. If you are putting money into savings, you might decide to cut back on your savings amounts to accommodate higher prices if you don’t want to compromise on your lifestyle.
Pursue higher earning opportunities: More income is the best way to offset higher costs (although on the macro level, one might argue this contributes to inflation). You can seek higher income through a raise or a job change. On average, companies were planning to give out raises of 3.4% in 2022. While every bit helps, a raise of this size won’t fully offset 7%+ inflation. Switching jobs entirely typically offers the chance for a bigger increase.
Consolidate debt at a lower (fixed) interest rate: If the government seeks to fight inflation by raising interest rates, you may see the interest rate on your credit cards increase as well. By consolidating your debt with a personal loan, you’ll trade your high-interest variable rate for a lower fixed rate. This will keep more money in your own pocket.
Consider for 1-3 year goals: To maintain the purchasing power of cash you have set aside for 1-3 year goals, you may want to consider buying US Series I Savings Bonds (aka I bonds). They are designed to keep up with inflation and currently offer a rate of 7.12%. However, the rate is only good for 6 months and you are limited to buying $10,000 per year. You also must hold the bonds for 12 months before cashing them out, so this is not a great place to keep emergency fund money that you might need to access quickly.
Invest cash you don’t need for 3+ years: If you’re sitting on money in your bank account that you don’t plan to use in the next 3+ years, it could be working harder for you in an investment account. You don’t need to invest in anything crazy—the usual mix of stocks and bonds is still a solid long-term strategy, even during a period of inflation.
Stay focused on your goals: As tempting as it is, the last thing you want to do is make a big financial decision based on economic factors rather than your personal goals. It doesn’t make sense to dump your travel fund into crypto or overextend yourself by buying real estate when your most immediate goal is to pay off credit card debt. Many experts expect inflation to drop by the end of 2023. You don’t want to make a major irreversible financial decision based on a temporary economic factor.
6 Things to Do Instead of Freaking Out About Inflation is written by Kylie Lipinski, A Certified Financial Trainer for financialgym.com