Inflation – the increase in consumer prices – is the slow erosion of your money over time. Before 2021, the United States had seen annual core inflation not exceed 3% for the better part of 25 years.
So the 7.5% increase in the prices of fuel, used vehicles, groceries and everything else in the last one year is a sudden and systematic increase that can jolt the daily spending of most people.
The COVID-19 pandemic stimulus checks and tax relief, along with the reopening of the economy, met consumer demand, but did not replace product inventory.
“Having supply chain difficulties looks a lot like inflation,” says Michael Ashton, managing principal of Enduring Investments, a consulting and investment firm in Morristown, NJ.
How can you protect yourself when inflation is reducing your spending power?
check your expenses
Cut only 5% of discretionary spending, or voluntary spending, in categories like entertainment or travel. This is one of those incremental changes that is not so difficult to make and goes straight to the bottom line of your budget.
Do not delay with a big purchase; Prices are likely to increase further.
Shop strategically. Buy more generic brand products and prescriptions. Save on essential expenses by using coupons and store loyalty programs. Use a membership card to pay 5 cents less per gallon for gasoline.
look for savings
Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). Many banks waive such fees, and credit cards often have fee-free options.
Renegotiate bills like cable, streaming services or cellphones for any potential savings. “I can say from personal experience – it’s amazing how easy it is,” Ashton notes. He says that every time he would call his cellphone provider, it would offer him a plan that was far better than his current one. “And it doesn’t happen until you call,” Ashton says. He now makes it a habit to call once a year and ask, “What’s the best plan you have and should I be on it?”
Reduce the number of subscriptions you have, even if it’s only one. “You should audit those from time to time because sometimes they hide in a price increase, and it just shows up on your credit card,” says Ashton.
try to bring in more money
Look for financial institutions that pay higher interest rates than you earn right now (if you’re earning anything). Online banks and credit unions often offer high-yield savings accounts that sweeten returns, especially as interest rates rise.
Perhaps the most powerful thought of all: Ask for a raise. If you haven’t received a salary increase in a few years, you’ve probably experienced how much pay cuts are caused by inflation, Ashton says.
Inflation Matched Savings Account
Another inflation-fighting idea: Series I savings bonds. They were created specifically to protect consumers’ purchasing power against inflation, says Zvi Bodie, professor emeritus in finance at Boston University.
I bond rates are critical to the rate of inflation, which recently exceeded 7%, he noted. They are an ideal safe haven for near term savings. And not bad for your long-term nest egg either.
The minimum investment in I bonds through TreasuryDirect.gov is only $25, and a person can put up to $10,000 annually in savings bonds with electronic purchases. Bonds pay a fixed interest and inflation rate, which is adjusted twice per year.
You can withdraw your savings after one year without any penalty, but if you redeem them before five years, you will lose the value of interest for the last three months.
“So what you get is essentially a savings account that can’t go down, and that’s going to increase with inflation,” Bodi says. “Do I need to say anything else?”
Inflation is not the same for everyone
Inflation hit the national average of 7.5% in January, but that’s not likely to be your inflation rate, Ashton says.
You may consume different items than the average person and you may not live in the same place as the average, so your particular inflation rate varies greatly from the average, according to Ashton.
So instead of agonizing over the same numbers as the loss of spending power, use the little money above to slowly but surely improve your financial situation.