5 Ways to Rethink Your Money for Inflation – Forbes Consultant
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Inflation eats away at your money. The CPI inflation report for February shows that prices of goods and services rose 7.9% from the same period last year, the highest inflation rate since January 1982.
American households are feeling the pressure on their finances from rising prices. The majority of respondents in the latest tracked Forbes Advisor-Ipsos Consumer Confidence Biweekly report are either very concerned or somewhat concerned about rising gas prices, inflation, and an increased grocery bill.
With the Russian invasion of Ukraine exacerbating the ongoing supply chain disruptions of Covid-19, experts warn that inflation is here to stay for the foreseeable future – now making it a good opportunity for consumers to rethink their overall financial strategy.
How to Revalue Your Money During Inflation
If you find your money scattered these days, you’re not alone. Forty percent of adults say their families are worse off financially now than they were before the pandemic, according to a recent survey by The New York Times and Momentive.
If your spending allowance isn’t always what it used to be, or you’re starting to worry about your investment portfolio, follow these five steps to rethink—and adjust—your financial plan.
1. Know where you stand
Before you start rolling out your money, you’ll want to know your personal stance on inflation; Calculating your personal inflation rate can help you do this.
The personal inflation rate is more specific than the national inflation rate that is routinely cited in the headlines. If you’re someone who doesn’t eat a lot of meat, for example, you’ve been able to avoid buying products with some of the highest price increases to date. If you routinely eat fast food or dine at restaurants, you’re paying more per order than you did a year ago.
To calculate your personal inflation rate, subtract your monthly spending from a year ago from your current monthly spending. Then divide this difference by your monthly spending from a year ago. For example, if your current monthly spending is $2,500, and it was $2,100 a year ago, your personal inflation rate is 19%.
Your personal inflation rate will help you identify why you feel like your money isn’t stretching as far as it used to be — and can motivate you to cut any unnecessary spending or fees in your budget.
Read more: How to Calculate Your Personal Inflation Rate
2. Be smart with a budget
Once you understand your spending and personal inflation rate, it’s time to get back to budgeting basics.
A budget is what creates a solid foundation in anyone’s financial plan. Even if you don’t keep track of your budget until you hit every dollar, knowing the money that’s coming in – and going out – each month will help you identify opportunities to increase your income even further.
An inflation budget requires reviewing your budget with a fine-tooth comb and looking at each section from a savings perspective. Look at the debt repayment category: Are there opportunities to save money on interest payments, either by combining credit card debt into a 0% balance transfer or a low fixed rate personal loan?
For example, transferring $4,500 credit card balance with a 14% interest rate to a 0% balance transfer card with a 2% balance transfer fee could save you close to $1,000 (assuming you pay off your balance during the introductory rate period of $1,000). 12 months). Most balance transfer cards are usually offered at 0% interest only to consumers with very good or excellent credit, so this strategy will not apply to everyone.
Read more: Balance Transfer Calculator
If you’re an avid credit card user, you can easily lose control of your budget as you swipe your card for everyday purchases, especially if you don’t pay close attention to cost increases over time. Studies show that it is easier to overspend with credit cards, because they take away the physical process of handing over cash, making it difficult for consumers to understand how much they are really spending.
It is possible to maintain your budget while using credit cards. For example, you can create a monthly spending limit and set up notifications to update you when you get close to that limit. You can also store any rewards or cashback winnings to redeem within a month when unexpected costs arise, so you don’t have to dip into an emergency fund to cover the tab.
3. Reduce unnecessary fees
Inflation has already taken a large part of your income; Don’t let the miscellaneous fees bite you, either.
Almost all financial products charge fees, from credit cards to bank accounts to prepaid debit cards. While some of them are unavoidable, you can eliminate some fees from your spending.
For example, credit cards can come with a range of fees, including late fees, return payment fees, and overstay fees. Avoid this by paying attention to the minute details in your user agreement, how much you spend on your card and when your bill is due.
Read more: 9 common credit card fees and how to avoid them
Annual fees on credit cards is another story. In some cases, the exorbitant annual fees on rewards cards can be paid essentially “for themselves” if you take advantage of all the card’s benefits, such as spending a significant amount of time in airport lounges.
But if you are someone who travels maybe once a year, this expensive travel rewards card may not be worth paying, and you should consider canceling it. Keep in mind that closing credit accounts can temporarily damage your credit score.
But you can still fall victim to fees if you primarily use a debit card linked to your checking account. The average overdraft fee is $25, according to a 2021 Forbes Advisor checking account wage survey, and some banks charge more than $5 a month just to maintain the account. If your checking account is constantly charging you high fees, consider switching to an online bank or credit union; Both tend to charge lower fees. In 2022, Citibank became the first major US bank to eliminate overdraft fees entirely.
Some banks will charge a minimum monthly balance fee on checking accounts, which means if you don’t keep a minimum amount of money in the account, you will be charged. This can be especially painful if you live from paycheck to paycheck. The list of no-fee checking accounts includes multiple options without the monthly balance requirement.
Read More: Checking Account Fees Still Expensive: How to Avoid Them
4. Stay on track with investments
Now that the Federal Reserve has raised rates in an effort to tame inflation, investors are shaky. You may be tempted to fiddle with your investment portfolio during the volatility – but you shouldn’t. The general rule of investing still applies: stick to your long-term plan.
You will likely want to continue investing in stocks during these uncertain times, especially in your retirement accounts. While 401(k) loans are an option if you need immediate money, taking out a loan now means you’ll lose compound interest in the future.
These loans also come with risks. If you leave your job, you will be in trouble to pay off the loan by tax day, or it will be considered an early withdrawal subject to taxes and a penalty.
Read more: Is the US headed for another recession?
5. Keep up with your savings
Times of high inflation may make you wonder if it’s time to cut back on your savings. But doing so may leave money on the table.
The Federal Reserve is expected to raise interest rates six times this year to try to curb inflation. Savings account rates may not jump right away, but eventually banks will come under pressure to increase interest rates on savings accounts. Getting into the habit of saving now means you’ll have more money to double the interest once rates increase.
If you are already contributing to savings goals, now might be a good time to evaluate them. If you’re short on cash to spend each month due to price hikes, can you lengthen your savings goals for a few months?
Keep in mind that all money travels are a marathon, not a sprint – and now may be your chance to find a new pace.
Read more: How a Fed rate hike will affect savings accounts