Inflation can significantly impact your personal finances, and has been a frequent news topic in the past year.
Let's break down what inflation is, what it's doing, and what it means for you.
What is Inflation?
Inflation is the increase in prices of goods and services over time. For example, the average cost of a cup of coffee was $1.59 in 2019 and only 25 cents in 1970.
Inflation is normal, and a sign of a healthy economy. It's usually around 2-3% per year. In times of significant social and economic change, however, inflation can be extremely volatile.
Why does inflation happen?
Prices can increase as a result of higher demand for a good or service, or it can happen as a result of increased costs to produce goods and services.
Higher demand: if a company can't produce their product fast enough to keep up with consumers who want it, they will raise prices.
Increased costs: if a company is suddenly paying more to produce their products, they will pass those costs on to consumers, raising prices to maintain profit.
How inflation impacts you?
When the price of goods and services rise, your purchasing power decreases, meaning your paycheck doesn't go as far. Seeing your bank account shrink faster than normal can be extremely stressful, and lead people into financial panic mode (keep reading for how to combat this in the "how to handle inflation" section below).
What's happening with inflation right now?
We are currently in a period of disinflation, which is a real word, and means that while prices are still increasing, the rate at which they increase is declining. This is good news: disinflation doesn't mean the economy is in a decline (which would be deflation), it just means inflation is heading back to the average 2-3% range.
Inflation was 9.1% in July 2022, and is now at 4.9% (as of the end of April 2023). So while prices are still higher than usual, they aren't as high as they were a year ago.
How to beat inflation
Inflation is a hot topic right now, and for good reason. Prices for goods and services are rising at their fastest pace in decades, and it's putting a strain on household budgets. If you're feeling the pinch, don't worry, you're not alone. Here are 5 ways to handle inflation and protect your finances.
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1. Spend Intentionally
It's important for everyone to have a clear plan for everyday spending, in which they track where their money is going (and why). We call this an Intentional Spending Plan, and it's one of the key ways we see our Bolder Members go from stressing about money to confidently building wealth.
Cut back on unnecessary expenses, take a close look at your budget and see where you can cut back. Are there any subscriptions you can cancel? Can you cook more meals at home instead of eating out? Every little bit helps.
We also recommend that clients keep in their back pocket a version of their spending plan that answers the question: "what could I cut temporarily if I absolutely had to?" Then, when unexpected expenses come up, like the things you usually buy costing a lot more thanks to inflation, you have this plan to fall back on, and alleviate some of the financial strain you're feeling. This backup spending plan can help you continue to live above your means when prices are high, and can be useful anytime you experience a decrease in your income, whether from job loss or health issues.
2. Shop around for better deals
Inflation has made it more important than ever to shop around for the best deals. Compare prices before you buy, and don't be afraid to haggle. You can also save money by using coupons and promo codes.
When you're shopping for anything, it's always a good idea to compare prices from different retailers. You can do this by using online price comparison tools or by visiting different stores in person.
If you're buying a big-ticket item, it's worth haggling with the seller to try to get a better price. You can also save money by using coupons and promo codes. There are many websites that collect coupons and promo codes, or you can sign up for email lists from your favorite retailers to be notified of upcoming sales and promotions.
3. Consider using a credit card with rewards
If you use a credit card responsibly, you can earn rewards that can help offset the rising cost of living. Look for a card that offers cash back, travel points, or other types of rewards that you can use to save money.
If you use a credit card responsibly, you can earn rewards that can help offset the rising cost of living. There are many different types of credit cards available, so it's important to compare offers and choose one that offers rewards that are valuable to you.
Some popular types of rewards include cash back, travel points, and merchandise rewards. Cash back rewards can be used to offset your everyday expenses, while travel points can be used to book flights and hotels. Merchandise rewards can be redeemed for items like electronics, gift cards, and home goods.
It's important to note that you should only use a credit card if you can afford to pay off your balance in full each month. If you carry a balance, you'll be charged interest, which can quickly add up.
4. Earn More
It's also a good idea to think outside the box about earning some extra money when your purchasing power drops. Need some ideas? We've got you.
- Ask for a Raise: Never hurts to ask for more money, especially when you know you're worth it, do some quick research to compare your pay against market rates.
- Freelance work: If you have skills that you can offer to others, you can freelance on websites like Upwork or Fiverr. You can find work in a variety of fields, including writing, editing, graphic design, web development, and more.
- Start a side hustle: If you have a passion for something, you can turn it into a side hustle. This could be anything from selling handmade goods to starting a blog.
- Take on a part-time job: If you have the time, you can take on a part-time job to earn extra money. This could be anything from working retail to driving for a ride-sharing service.
- Invest in yourself: If you're looking for a long-term solution, you can invest in yourself by getting a degree or certification. This will help you qualify for higher-paying jobs.
It's important to note that there is no one-size-fits-all solution for earning extra money. The best approach for you will depend on your individual skills, interests, and availability.
5. Invest for the long term
Inflation can be a short-term pain, but it's important to remember that it's usually temporary. By investing for the long term, you can help to protect your money from inflation and grow your wealth over time.
There are many different investment options available, so it's important to do your research and choose investments that are appropriate for your risk tolerance and investment goals. Some popular investment options include stocks, bonds, and mutual funds.
Stocks are shares of ownership in a company. When you buy stocks, you're essentially buying a piece of the company. Stocks can be volatile, but they have the potential to grow your wealth over the long term.
Bonds are loans that you make to a company or government. Bonds are typically less volatile than stocks, but they also offer lower potential returns.
Mutual funds are baskets of stocks or bonds that are managed by a professional investment manager. Mutual funds can be a good option for investors who want to diversify their investments and don't have the time or expertise to manage their own portfolio.
It's important to remember that investing is a long-term endeavor. Don't expect to get rich quick. Instead, focus on investing for the long term and let your money grow over time.
Remember, Stay Calm
When inflation is high, the financial tension tends to be, too. This is when we see people using credit cards more, pulling money out of investments, or making other choices that aren't necessarily aligned with their financial goals. Follow the two steps above, and remind yourself that this is temporary.
When you go to make a financial decision, check in with your emotions, and make sure you're making the most reasonable choice for your life (and not one out of fear or anxiety).
Here are some additional tips and tricks that you can use to save money:
- Use public transportation or carpool. This can save you money on gas and parking.
- Buy in bulk. This can save you money on groceries and other household items.
- Grow your own food. This can save you money on produce and other fresh foods.
- Make your own repairs and maintenance. This can save you money on labor costs.
- Shop at thrift stores and garage sales. You can find great deals on used clothes, furniture, and other items.
- Cancel unused subscriptions. This can save you money on streaming services, gym memberships, and other monthly expenses.
- Don't be afraid to ask for help. There are many resources available to help you save money, such as financial aid programs and working with a financial coach.
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