Inflation: ways to “deflate” your budget
For most people, “inflation” is a scary word. This means that the money you earn today will not be worth much tomorrow, and that you will have to pay more for the same products and services in the future.
In the US, policy makers are trying to keep the inflation rate at around 2% per year, to keep pace with the growth of the economy. What costs $1 to buy this year (overall) will cost $1.02 next year, and someone who earned $12 an hour this year might earn $12.25 an hour next year.
Problems begin to arise when inflation exceeds this norm – as it did this summer!
By July 2021, consumer prices had increased by 5.4%. While most economists agree that this unusually high growth is likely a “temporary shock” caused by the sharp ups and downs of the pandemic, it is not clear how long it will last, or what is the best strategy to fix it.
While we wait to see what happens next, you still have options to protect your money from inflation:
- Add backup to your budget. To avoid unexpected shortages at the end of the month, it may be helpful to give yourself a little space (3-5%). For example, if you normally spend $500 on groceries in one month, set aside $515 to $525 instead. If you exceed your usual spending by five or ten dollars, don’t worry – it will still be well under budget.
- Be a frugal traveler. If you’re like most people, you’re probably eager to get out of town and go somewhere new. While airfares fell in August, the cost of flying is still about 32% higher than last year. This has many vacationers looking to continue mapping their road trips – which can also result in some shocks stuck at the pump. Gasoline is also up about 50% from last year. Find creative ways to save: staying with family or friends, vacationing close to home or using public transportation can all help keep costs down.
- Shop for deals. After a year of spending more time at home, consumers are ready to update their wardrobe…but their budgets may not be. Clothing prices are up 4% from last year, which means it’s not a good time to buy new clothes from the shelves, and the best option is to refrain from buying clothes until prices stabilize. If that’s not possible, look for sales or shop at factory outlets, thrift stores, or online shipping sites instead.
- Invest the rest. This is nothing new: investing has always been a reasonable way to fight inflation. A low-risk diversified portfolio can grow your money over time, while it will slowly lose value in an interest-free checking account.
While there are still many unknown variables as of late, it is important to remember that inflation is likely to ease over time. Until that happens, good habits for financial health remain unchanged: shop smart, save carefully, and be prepared to adjust your budget according to circumstances.
Dan Karas is executive vice president of Allied Affiliated Funding, a division of Axiom Bank, which offers asset-based lending and bill discounting.