Inflation is eroding your purchasing power. According to the CPI, prices for goods and services rose 7.9% year on year in February, the fastest rate since January 1982.
Increasing expenditures are pinching American households. According to a new Forbes Advisor-Ipsos Consumer Confidence Biweekly Tracker, most respondents are either very anxious or moderately concerned about increasing gas costs, inflation, and food bill hikes.
With Russia’s invasion of Ukraine adding current disruptions to the Covid-19 supply chain, experts warn that inflation is here to stay for the foreseeable future, making this an excellent time for consumers to reassess their whole financial plan.
How to Reassess Your Financial Situation During Inflation
If you’re struggling to make ends meet these days, you’re not alone. According to a recent study conducted by the New York Times and Momentive, 40% of individuals believe their families are worse off financially today than they were before the epidemic.
If your spending limit isn’t lasting as long as it once did, or you’re becoming nervous about your investment portfolio, follow these five steps to rethink—and adjust—your financial strategy.
1. Recognize Your Position
Before you begin reorganizing your finances, you’ll want to determine your inflation rate; this may be accomplished by deciding your inflation rate.
A personal inflation rate is more precise than the headline-grabbing national inflation rate. If you do not consume a lot of meat, you have avoided buying goods that have seen some of the most impressive price spikes in recent history. If you often order takeout or dine out, you’re spending more per order than a year ago.
Subtract your monthly expenditure from a year ago to get your inflation rate. Then divide the difference by your previous year’s monthly spending. For instance, if your monthly expenditure is $2,500, up from $2,100 a year earlier, your inflation rate is 19%.
Your inflation rate might help you interpret why it seems as if your money isn’t going as far as it used to—and can inspire you to eliminate any excessive spending or fees from your budget.
2. Budget Wisely
Once you’ve figured out your expenditure and your inflation rate, it’s time to revisit the fundamentals of budgeting.
A budget is a bedrock upon which every financial strategy is built. Even if you do not adhere to your budget to the letter, knowing how much money comes in — and goes out — each month can assist you in identifying possibilities to stretch your income further.
Budgeting for inflation entails combing through your budget with a fine-toothed comb and examining each component in terms of savings. Consider the following type of debt repayment: Is it possible to save money on interest payments by consolidating credit card debt into a 0% balance transfer or a cheaper fixed-rate personal loan?
For instance Oak Park Financial – Montana, moving a $4,500 credit card debt with a 14% interest rate to a 0% balance transfer card with a 2% balance transfer fee may result in a total savings of approximately $1,000. (assuming you pay off your balance within the 12-month introductory rate period). Since most 0% interest balance transfer cards are often only available to customers with extremely strong or exceptional credit, this method does not apply to everyone.
If you’re a frequent credit card user, it’s easy to lose control of your budget when swiping your card for routine purchases, particularly if you’re not vigilant about rising costs over time. Credit cards make it simpler to overspend since they remove the act of passing over cash, making it more difficult for customers to grasp their spending correctly.
However, it is feasible to stick to your budget while using credit cards. For instance, you may establish a monthly spending limit and get warnings when you approach that limit. Additionally, you may accumulate any rewards or cash-back earnings to redeem during a month when unexpected expenses occur, avoiding the need to dig into your emergency fund.
3. Eliminate Extraneous Fees
Inflation already eats away at your income; don’t let incidental fees eat away at it.
From credit cards to bank accounts to prepaid debit cards, almost every financial instrument charges a fee. While specific prices are inevitable, you may reduce your expenditure on others.
For example, credit cards may impose a slew of costs, including late penalties, returned payment fees, and over-limit fees. Avoid this by reading the tiny language in your user agreement, keeping track of how much you spend on your card, and paying attention to when your payment is due.
Annual fees on credit cards, on the other hand, are a different matter. In certain situations, annual fees on credit cards may effectively “pay for themselves” if you use all of the card’s benefits, such as spending substantial time in airport lounges.
However, if you travel less than once a year, a travel rewards card with a high annual fee may not be worth it, and you should consider canceling it. Bear in mind that balancing credit accounts might have a temporary negative impact on your credit ratings.
If you use a debit card linked to your checking account, you may incur costs. Forbes Advisor’s 2021 checking account costs study found the average overdraft fee is $25, and some banks charge more than $5 per month to keep the account. If you’re constantly tasked with hefty fees, try moving to an online bank or credit union; both offer lower costs. Citibank became the first central bank in the United States to abolish overdraft fees in 2022.
Certain banks may even levy monthly minimum balance fees on checking accounts, which means you will be penalized if you do not maintain a certain minimum level in the report. This might be incredibly distressing if you live paycheck to paycheck. This list of no-fee checking accounts contains a variety of alternatives that do not demand a minimum monthly balance.
4. Maintain Consistency With Investments
Investors are becoming nervous as the Federal Reserve raises interest rates to rein in inflation. You may be tempted to make changes to your investment portfolio during periods of volatility—but you should refrain. The overall investment guideline remains the same: stick to your long-term strategy.
You’re likely to want to maintain an equity position in these unpredictable times, particularly in your retirement plans. While 401(k) loans are possible if you want quick cash, accepting one now means you will lose out on future compounding earnings.
These loans are not without danger. If you leave your work, you will be responsible for repaying the loan before Tax Day, or it will be treated as an early withdrawal, subject to taxes and a penalty.
5. Maintain Your Savings
You may be thinking about whether now is the time to reduce your savings in times of rising inflation. However, doing so may result in money being lost.
The Federal Reserve is anticipated to hike interest rates six times this year to rein in inflation. While savings account rates may not instantly rise, banks will ultimately be compelled to do so. By establishing a savings habit today, you’ll have more money available for compounding interest whenever interest rates rise.
If you already contribute to savings objectives, now may be an appropriate moment to reassess them. If you’re running out of funds each month due to rising expenses, can you extend your savings objectives by a few months?
Bear in mind that all financial journeys are marathons, not sprints—and that this may be your opportunity to pick up the pace.