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Inflation is eating your money. The February CPI inflation report shows that the price of goods and services rose 7.9% over the same period last year, the highest inflation rate since January 1982.
American households are suffering the pressure of rising prices on their finances. Most respondents to a recent bi-weekly Forbes Advisor-Ipsos Consumer Confidence Tracker are very concerned or somewhat concerned about rising gas prices, inflation, and rising grocery bills.
With the Russian invasion of Ukraine exacerbating Covid-19’s continuing supply chain disruptions, experts warn that inflation is here to stay for the foreseeable future, making it now a good opportunity for consumers to rethink their general financial strategy.
How to reevaluate your finances during inflation
If you are finding that your money is scarce these days, you are not alone. Forty percent of adults say their families are worse off financially now than they were before the pandemic, according to a recent New York Times and Momentive poll.
If your spending allowance doesn’t last as long as it used to, or you’re starting to feel nervous about your investment portfolio, follow these five steps to rethink and adapt your financial plan.
1. Know where you are
Before you start revamping your finances, you will want to know where you are personally with inflation; calculating your personal inflation rate can help you do this.
A personal inflation rate is more specific than the regularly cited national inflation rate in the headlines. If you are someone who does not consume a lot of meat, for example, you have managed to avoid buying products with some of the highest price increases to date. If you routinely eat takeaway or restaurant lunches, you pay more for each order than you did a year ago.
To calculate your personal inflation rate, subtract your monthly expense from a year ago from your current monthly expense. Then, divide that difference by your monthly spend from a year ago. For example, if your current monthly spend is $ 2,500 and it was $ 2,100 a year ago, your personal inflation rate is 19%.
Your personal inflation rate will help you contextualize why it seems your money isn’t stretching as it once did and can motivate you to cut any unnecessary expenses or fees in your budget.
Read more: How to calculate your personal inflation rate
2. Get smart with the budget
Once you understand your spending and personal inflation rate, it’s time to get back to the basics of budgeting.
A budget is what creates a solid foundation in anyone’s financial plan. Even if you don’t track your budget down to every single dollar, knowing what money goes in and out each month will help you identify opportunities to further increase your income.
Budgeting for inflation requires examining the budget with a fine-toothed comb and examining each section from a savings perspective. Look at your debt repayment category: Are there opportunities to save on interest payments by consolidating credit card debt into a 0% balance transfer or personal loan with a lower fixed rate?
For example, transferring a $ 4,500 credit card balance with a 14% interest rate to a 0% balance transfer card with a 2% balance transfer fee can save you nearly $ 1,000. in total (assuming you pay the balance within the 12-month launch rate period). Most 0% interest balance transfer cards are generally only offered to consumers with very good or excellent credit, so this strategy doesn’t apply to everyone.
Learn more: Balance transfer calculator
If you’re an avid credit card user, you can easily lose control of your budget as you swipe your card for daily purchases, especially if you don’t pay close attention to rising costs over time. Studies show that it is easier to overspend on credit cards, as it eliminates the physical process of delivering money, making it difficult for consumers to truly understand how much they are spending.
However, it is possible to keep the budget while using credit cards. For example, you can create a monthly spending limit and set up notifications that update you when you are close to that limit. You can also rack up rewards or refunds to redeem over a month when unexpected costs arise, so you don’t have to tap into your emergency fund to cover the bill.
3. Cut unnecessary commissions
Inflation is already taking a slice of your income; don’t let the various commissions get in the way too.
Almost all financial products charge fees, from credit cards to bank accounts to prepaid debit cards. While some are unavoidable, you can eliminate some fees from your spending.
Credit cards, for example, can carry a flurry of fees, including late fees, returned payment fees, and over-the-limit fees. Avoid them by paying attention to the fine print in your user agreement, how much you are spending on your card, and when the invoice is due.
Read More: 9 Common Credit Card Fees And How To Avoid Them
Annual credit card fees are another story. In some cases, the expensive annual fees on reward cards can essentially “pay for themselves” if you take advantage of all the card’s benefits, such as spending a significant amount of time in airport lounges.
But if you are a person who travels maybe once a year, that travel reward card with a hefty fee may not be worth paying and you should consider canceling it. Keep in mind that closing credit accounts can temporarily alter your credit scores.
But you could still be the victim of fees if you primarily use a debit card linked to your checking account. The average overdraft fee is $ 25, according to Forbes Advisor’s 2021 checking account fee survey, and some banks charge more than $ 5 a month just to hold the account. If your checking account continually charges you high fees, consider switching to an online bank or credit union; they both tend to charge less fees. In 2022, Citibank became the first major US bank to completely eliminate overdraft fees.
Some banks will also charge monthly minimum balance fees on checking accounts, which means that if you don’t keep a minimum amount of money on the account, you will be charged. This can be especially painful if you are living from paycheck to paycheck. This fee-free checking account list includes multiple options with no monthly balance requirements.
Learn more: Current account fees remain expensive: how to avoid them
4. Stay on course with investments
Now that the Federal Reserve is raising rates in an effort to tame inflation, investors are getting shaky. It may be tempting to tinker with your investment portfolio during volatility, but you shouldn’t. The general investment rule still applies: stick to your long-term plan.
You will likely want to stay invested in stocks during these uncertain times, especially in your retirement accounts. While 401 (k) loans are an option if you need immediate funds, taking out a loan now means you will lose compound interest for the future.
These loans also carry risks. If you leave your job, you will be ready to repay the loan by Tax Day, or it will be considered an early withdrawal subject to taxes and penalties.
Read more: Is the US headed for another recession?
5. Keep up with your savings
Periods of high inflation may make you wonder if now is the time to cut back on your savings. But doing so could leave money on the table.
The Federal Reserve is expected to raise interest rates up to six times this year to try and curb inflation. Savings account rates may not rise immediately, but eventually banks will be pushed to raise interest rates on savings accounts. Getting into the habit of saving now means you’ll have more money to raise interest once rates go up.
If you are already contributing to your savings goals, now may be a good time to evaluate them. If you are short of cash to spend each month due to rising prices, can you extend your savings goals by a few months?
Keep in mind that all financial travel is a marathon, not a sprint, and now may be your chance to find a new pace.
Read more: How the Fed’s Interest Rate Hike Will Affect Savings Accounts