If you feel like you have been paying more for everything lately, you are not alone. Inflation has soared over the past year. At 7.5% for the main inflation index, this is a 40-year high. Consumers are seeing their purchasing power erode. Many economists are split on how long the inflation will last. We are going to discuss seven strategies that you can implement to help you curb the effects of inflation.
What is inflation?
Inflation is defined as the decline of your purchasing power over time. Also referred to as the ‘silent tax’, this rise in prices is typically displayed as a percentage. It means that your dollar can purchase less today than what it would have a year prior.
One of the most widely used measures of inflation is the Consumer Price Index (CPI) which is calculated by the U.S. Bureau of Labor Statistics. The CPI measures how the cost of a “basket” of consumer goods and services paid by urban consumers changes over time. In the last year, most of our incomes have not risen at the same rate that inflation has, which means that our purchasing power has decreased.
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Smart strategies to help you deal with inflation in 2024
1. Be an intelligent shopper
There are so many ways that you can save when shopping if you really want to. There are products that will save you money by forgoing specific branding or unneeded packaging. Purchasing products without the extra packaging will also help the environment so it’s a win-win situation.
Some other shopping tips include:
- Buy extra of what is on sale. Cook in bulk and then freeze the extra meals for a later time.
- Make a shopping list each week so that you only purchase items that you actually need.
- Substitute for similar products such as chicken instead of beef.
- Limit eating out or stop eating out altogether.
- Shop at a less expensive grocery store and use coupons.
- Shop thrift stores, facebook marketplace, and consignment stores for good deals.
- Replace expensive cable TV bills with low-cost video streaming.
2. Make and monitor your budget
So many of us use our cards or autopay for bills and a price increase can go unnoticed. Pay attention to the changes that happen month to month so that you can change your budget accordingly. This will help avoid an emergency situation where you cannot pay off your credit card debt. Track your progress and see how the little changes you make in your budget can help you save money. Regularly revisit your budget to ensure that you are on track to reach your financial goals.
3. Make sure that your cash is earning some sort of interest
One mistake people often make is keeping too much cash in a checking account that earns no interest. Consider moving your money to something like a money market or high yield savings account. While the interest will not likely beat inflation, it will help offset some of the effect of inflation.
If your cash is not earning any interest then inflation will eat away at your cash. For example, if inflation was 4% and you had $100 in cash, then by next year, that $100 would only have $96 worth of purchasing power. This will make a huge difference over the years if the inflation rate stays the same.
4. Maintain a diversified portfolio of investments
If you have an investment portfolio or a 401(k), individual retirement account (IRA) or other retirement account, then you want to make sure that these accounts are diversified. This could include stocks, bonds, index funds and other investment vehicles with varying levels of risk. Some investments can better protect you from inflation.
I Bonds have been a hot topic lately and may also be something that you consider.
A good financial planner can be very beneficial when you are looking at diversifying your portfolio. They can help ensure that your investments have the right balance to match or outpace inflation.
5. Build an emergency fund
We always talk about building an emergency fund. An emergency fund is a savings account where you have some money for unexpected expenses. This is the best thing that you can do in case a situation arises where you quickly need money. While it won’t directly protect you from inflation, it can help prepare you if your expenses push you over your usual budget.
6. Ask for a Raise
Asking for a raise at work can help you keep up with the increased cost of living. If the cost of goods goes up over time, but your pay remains the same, then it can become difficult to pay for your usual expenses. Do your best to keep your income growing as fast as your expenses so that you can try to keep up with the rate of inflation.
Data shows that wages are rising at the fastest pace in 20 years so make sure you are getting fairly compensated. If you are in a low wage job, try to find a better paying job and look for a job in a field that is expected to grow in today’s economy.
7. Cut unnecessary expenses
If inflation has made it impossible for you to stick to your budget then you may want to consider cutting unnecessary expenses. You could try to save money on gas by carpooling to work, or making your daily coffee at home, or stretching the time between your hair appointments, or doing your manicures at home. There are so many ways that you can cut unnecessary expenses but it’s up to you to decide what expenses you want to cut.
Should I change how I invest for retirement during an inflationary period?
Inflation doesn’t really change how you should be saving for retirement. Here at District Capital, we always recommend having diversified investments regardless of whether we are in an inflationary period or not. Don’t make any drastic changes based on the current inflation or changing market conditions as you may regret it. If you have a diversified portfolio then some of your investment may lose value, while others may gain value during those same market conditions. Ride out the waves in the market and your investments will likely pay off in the long run.
How is Social Security affected by inflation?
Social security is indexed for inflation. This protects people from the loss of purchasing power that occurs during a period of inflation. If you receive social security then you will see that your payments are going up.
Living in an inflationary economy
Avoiding inflation completely is impossible, but you can implement these 7 strategies to help minimize the effect on your finances. Planning ahead is the key to coming out ahead in the long run. You don’t have control over the economic conditions, but you do have control over your spending and saving habits. If you want help with your finances and are interested in having a comprehensive financial plan, feel free to schedule a discovery call with one of our financial advisors today!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.