Most of us are feeling the effect of inflation in various ways. We see higher gas prices, and grocery prices, and if you have any type of consumer debt that is not a fixed rate, you are probably paying a higher interest rate. Even savers can be affected by inflation: losing purchasing power due to low savings rates.
What is inflation?
Inflation is an increase in prices over a period of time.
We can see inflation in a particular sector, like housing prices or rent, or broad inflation across many areas, like gas, groceries, auto prices, healthcare, or other costs. It’s no surprise, then, that inflation can significantly impact the cost of living.
The Bureau of Economic Analysis (BEA) and the US Bureau of Labor Statistics (BLS) are both agencies that provide data about the nation’s economy including reporting on the Consumer Price Index (CPI), personal income, and consumer spending. The BEA Prices & Inflation page provides updated information on various measures of inflation.
What can I do about inflation?
While the factors that create inflation are largely out of our control, there are steps we can take to attempt to balance out the impact of rising prices. Budgeting steps can include cutting expenses to compensate for higher prices or earning more to keep up with inflation, but that’s just a starting point. Consider the following action steps:
Create a Budget & Understand Your Monthly Cash Flow
Use a worksheet, software or work with a Money Coach to decide which options for budgeting meet your needs and to get feedback about which expenses you might be able to adjust. Even making small adjustments in your budget can lead to big improvements in your finances. For instance, eating out one less night a week, removing a streaming service you rarely use, or simply reducing your energy use, may all add up to neutralizing rising prices across your budget.
Build Emergency Savings
Determine how much you need in emergency savings given that everything is more expensive. If you had an unexpected car repair, an appliance break down, or an unexpected trip to an aging parent, the odds are good that your withdrawals from emergency savings will be higher.
Assess Your Tolerance for Risk
When we invest our savings to fund long-term goals, we assume a rate of return that we hope is higher than inflation. When inflation is rising, we may need to consider how much risk we are willing to assume in our investments. Consider your short, medium, and long-term plans and needs for cash and emergency savings. Complete a risk tolerance assessment to be sure your savings and investments match your comfort level and the timelines for using the money.
When prices rise, sometimes insurance protection needs to be adjusted. Auto, renters, and homeowners insurance might need to increase to cover higher costs. If you have a claim, you’ll want to be sure you have adequate coverage to replace your losses. Consider whether you have adequate life and disability coverage.
Invest in Yourself
This one never goes out of style. Learn new skills to make yourself valuable to your current employer or if there’s a recession or layoffs, position yourself to be an attractive asset to new employers.
Earn More Income
To keep up with inflation and rising costs, you might consider a second job, overtime or a “side hustle” to make extra income to offset the higher costs of goods due to inflation. Get creative about thinking of the ways you might be able to earn more income.
Inflation can stress our monthly budgets and impact our sense of financial wellness. However, you can fight back by identifying small lifestyle adjustments that reduce your expenses or increase your income. Create a plan that starts by speaking with a Money Coach to assess which actions are best.
Information provided in this article is for informational purposes only and is not intended to offer specific personalized investment, financial planning, tax, legal, or accounting advice. We recommend that you consult an attorney, tax advisor, or accountant regarding your unique circumstances.
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