Disclaimer: This article is for informational purposes and should not be construed as individual personal financial advice.  Always do your research and make decisions based on your unique financial situation. 

Inflation.

This topic is receiving a lot of media coverage lately. You can not go a day without hearing about the potential impact of inflation. Commentators frequently discuss what the Government and Federal Reserve may do to slow inflation down.  It was even a topic in President Biden’s State of the Union address. 

According to the Bureau of Labor Statistics, inflation is about 6 percent, but in January 2021, inflation was only 1.4 percent. Within 12 months, inflation has increased multiple percentage points. 

However, inflation is not always bad. It is actually quite normal. In fact, the Federal Reserve Board estimates that an acceptable rate of inflation is about 2 percent or below. Issues arise when inflation increases at an accelerated pace. This is considered hyperinflation and this is when the Federal Reserve must address it.

While the Federal Reserve and government decide what they will do, you need to do something with your money now. 

This article will discuss what inflation is, what it does to your money, and what you can do to better position yourself and your family.  

What is Inflation?

“Yesterday’s price is not today’s price.” – Fat Joe

When Fat Joe made this statement, he was not talking about inflation, but of the cost of the services he provides. But it is a simple way to describe what inflation is.   

Investopedia defines inflation as the decline in purchasing power of a given currency over time. In other words, the prices have increased.  

An increase in the cost of goods and services may be beneficial for the producer because they can realize higher profits, but what if your wages aren’t increasing accordingly? That means the money you earn will be able to buy less. This can be problematic especially if a significant part of the population is in this situation. 

What does inflation do to your money?

Inflation means you will be able to buy less with the same value of money you had before. Think when you were able to fill your tank up for $45, but now you only get three-fourths of a tank. It now may cost you $60 to fill it up. You have the same amount of money, but the price is higher.  Below are some examples of company price hikes on the way.  

Procter and Gamble Price Hikes

Kimberly Clark Price Hikes

To begin, you must recognize that you cannot escape inflation unless you are completely off the grid.  People who are completely off the grid and are self-sufficient will likely have a lower impact than those who use the modern conveniences in society. Since most of us do enjoy the modern conveniences of society, what can you do?  

Below are five things you can do manage your money during inflation.

Eliminate or Refinance High-Interest Variable Debt

During times of inflation, the Federal Reserve will likely try to lower inflation by raising interest rates. Higher interest should slow the rate of inflation because it will cost more to borrow money. Additionally, when the Federal Reserve raises interest rates, lenders also raise interest rates. This is why the mortgage rates have increased and auto loans and other loan products will also rise.  

This could also mean that credit cards or any other variable debt such as an Adjustable Rate Mortgage will increase. This means you will be paying more interest on debt that you already accumulated, making it harder to pay down the principal. Obviously, this benefits the lender and not the borrower.  

Any type of debt that the interest rate can change at any moment is riskier than a fixed rate. It is ideal to pay off debt with adjustable rates, but if that is not feasible at the moment, seek a debt consolidation low-interest loan with a fixed rate. This way you will have a fixed payment for the requested length of time. Ensure there is no prepayment penalty on the loan and that you do not create more debt by using your credit cards again.  

Increase Your Income

As the cost of goods and services increases, so should your wages. But oftentimes this is not the case. Your wages are expenses to companies and during a time of inflation, the cost of employees also increases.  You must accumulate more income to keep up with the pace of the rising cost of goods. But more importantly, you need the extra money to continue to build wealth during this time.  

Also focus on building skills and improving your value in the marketplace. The world is always moving forward and changing, so you must continue to evolve with it. Seek out ways to build your skills now. Do not wait until you are forced to make a decision.  You do not want to make or the company has to make hard decisions that are not in your favor.

Having multiple streams of income is important. Think about an area that you enjoy where you can provide a service to others. With the proliferation of social media and the amount of time people spend on the platform, you might as well become a social media expert and start a social media marketing business. This is one of many ideas that you can start to increase your income.    

Increase Your Cash Reserve

During times of high inflation, you still need to have access to cash. If you have already saved 3-6 months of living expenses in your cash reserve or you are still working on it, add at least 5-7 percent more to keep up with inflation. For example, if your goal is to save three months of living expenses totaling $3000, then you would plan to save at least $9000. To keep pace with inflation, you should save an additional $630 or 7 percent to keep pace with inflation.  

When inflation increases and the Federal Reserve raises the interest rates, the banks will also increase your savings interest rates. But, do not rely on the bank’s interest rate alone. The rate will be more than the 1 percent you receive now, but it will not be enough to cover inflation. 

Buy What You Need in Bulk

As prices rise, you must buy what you need at the best value that you can. This may mean purchasing some items in bulk. As stated earlier, yesterday’s price is not today’s price so maybe the best time to buy it was yesterday. But with inflation, we also know that tomorrow’s price will not be today’s price so get what you need now.

Does this mean hoarding and buying out the store?

No. This is not a call to panic buy.  

But it is a call to identify the items that you and your family need and use often and buy a little extra. Remember to buy things that you need and use, not everything that you just desire because you still need to spend within your budget.  

So do not feel like you need to bust your budget to buy a closet full of toilet paper. You will not be able to buy everything that you need for eternity. At some point, you will have to face inflation. But you can delay the impact of inflation as much as you can now until you increase your income and/or the inflationary period slows down. 

Continue to Contribute To Retirement Accounts

Each year the Federal Government limits how much you can contribute to retirement accounts; for example a 401K, 403B, Traditional, or Roth Individual Retirement Account. The annual limits are below: 

Contribution Limits for 2022

• 401K & 403B – $20,500 ($27,000 for adults 50+)
• IRA (Traditional & Roth) – $6,000 ($7000 for adults 50+)

Some employers even match your retirement contributions up to a certain amount. Because these investment accounts have a maximum amount that you can contribute per year.  If you do not contribute, you will potentially miss out on benefits such as the employer match, tax deferral, or appreciated earnings on non-taxable growth. These benefits must be realized the same year as your contribution.  

So even during times of inflation, make sure to contribute to your retirement accounts. At a minimum, contribute up to the employer’s match. This is an immediate return on your money.  

Note, contributing to your retirement accounts is not the same as investing in the market. This is out of the scope for this article but will be discussed later. At this point, make sure that you contribute so that you qualify for the benefits every day.  

Conclusion

The only constant thing is change.  – Heraclitus

As our world and economy evolve, it’s important to assess the situation and respond accordingly.  Despite what the news reports say about the economy, some people still create wealth.  Why not you?

Assess your financial situation and see what steps you can implement now to manage your money well and build wealth even during inflation.  That’s getting your Finances On Point.

In the comments below, let us know what steps you will take to protect and grow your money during inflation?