Many of us are cheering for the recent improvement in inflation numbers, but why are our wallets not feeling that same sense of cheerful relief? That’s because there is a big difference between disinflation and deflation. What we are currently experiencing is a decreased rate of inflationary increases. As an example, a change from 4% annual inflation to 2% annual inflation means that a new good or service that used to cost $10 now costs $10.20 versus a projected $10.40.
This is different from deflation, where the actual good or service would decrease in price. For example, if we experienced a 2% rate of annual deflation that same $10 product would be expected to cost $9.80. Although that sounds great and would no doubt be a welcome relief to our wallets, that scenario can pose a whole host of other economic risks if it becomes widespread. With that context, hopefully, you see why a lower rate of inflation doesn’t feel as good as we hoped it would, meaning these higher prices are most likely here to stay. Use these tips to help you manage your finances during a time when the cost of living may stay persistently high for some time to come:
Short-term Strategies
To ease the budget pinch, seek lower cost alternatives on household items. Use an expense worksheet like this to see where your money is currently going or if you are more of a technophile, Quicken Simplifi, YNAB, and PocketGuard are good places to start. Then one by one, seek out an alternative, comparison shop or perhaps take an opportunity to eliminate something you aren’t using.
Prioritize needs over wants and watch the financing offers. Focus on necessities like housing, food, and healthcare. Postpone large ticket non-essential purchases that are likely going to strain your budget. Right now, many retailers are offering 0% financing offers, however, they come with a specific timeline, and most are offering to defer interest until the end of the promo period. This means if you don’t pay the balance in full by the time the offer is over, ALL of that interest will be tacked on at the end and you’ll find yourself having an even higher monthly debt obligation.
Cut unnecessary fees. Almost all financial products charge fees, from credit cards to bank accounts and even pre-paid debit cards. Review your statements or your user agreements to capture any added or increased fees. You can also just call your providers and ask for a fee breakdown. Negotiate and consider shopping around to keep the costs of your banking services as low as possible.
Pay down variable rate debt. During times of persistent inflation, interest rates hover higher for longer, and if you are carrying variable debt like credit cards, your interest rates most likely have gone up, and with that, so have your payments. Consider creating a plan to pay off debt of an annual percentage rate (APR) of 7% or greater ASAP. You can use a tool like this to help and this resource for more strategic ideas.
Pay yourself. Take advantage of the higher interest rates to pay yourself more via your cash and savings accounts. You can evaluate options for high yield savings, CDs, and money market accounts on a site like depositaccounts.com.
Long-term Strategies
Don’t panic and make any drastic changes to your investments. Stocks have outperformed inflation historically from 1927-2020, but this doesn’t mean you need to inflate your risk. What it means is that you don’t have to chase down and overload your portfolio with so called “inflation plays.” Instead, stick to a long-term investment approach that is tied to your goals and risk tolerance. Read more about how to invest based on the goals you’re saving for here.
Take meaningful action and invest in yourself and your career. Warren Buffett has stated that your career can be the best way to protect against rising prices. Start with having strategic conversations with your manager/employer on your career progression and try enlisting a mentor to help with those efforts either at the company or outside. Another idea is to take free or low cost online courses to bump up your skill set or learn a new skill set that is high value. I further discussed how this can be the most profitable investment you can make here.
Putting It All Together
Inflation won’t last forever, but it can stick around long enough to cause stress that can impact our short and long-term decisions. Use these tips to make adjustments in the short-term that can help alleviate any immediate financial stress, invest in yourself, and stick to your long-term goals-based investment strategy. If you have trouble controlling your impulses or just want professional help, please reach out to an unbiased and qualified financial planner or coach. Your employer may even offer access to one for free through your workplace financial wellness program.