Inflation. This term is mentioned a lot these days from the general economy to regular household products. But, what is inflation, exactly?
According to the Bureau of Labor Statistics, inflation is defined as “the overall general upward price movement of goods and services in an economy.” In simpler terms, it means we’re paying more for just about everything. While inflation is unpleasant to our checking and savings accounts, a modest level of inflation is a sign of a strengthening economy. However, that brings little comfort to those who need to get creative and find ways to stretch our paychecks further.
Whatever your current financial situation, there are ways to protect yourself from the effects of inflation.
Tips to Fight Inflation
Buy in bulk. As we’ve witnessed during the pandemic, some items increase in price faster than others (i.e., toilet paper, any form of antibacterial cleaner). Monitor the cost of items you buy most or know you’ll need in the near future, such as frozen foods, non-perishable pantry items, and cleaning products. Consider stocking up on these items now to combat increased costs later, but let’s not panic buy and re-create the toilet paper shortage of 2020!
Purchase big-ticket items now. If you’re thinking about purchasing a new car or household appliance - don’t wait! These big-ticket items typically rise in cost quicker and exponentially during inflation. Waiting too long to make your purchase could add hundreds, even thousands, to the price. That being said, if you are looking to make your purchase, invest in a long-lasting, quality product that won’t need replacement or service anytime soon. You might pay more up front, but your maintenance and interest costs will be lower.
Examine your current debt. Most of us have debt in the form of car loans, credit cards, and mortgages. In this case, inflation can work to your advantage. How? Inflation allows you to pay back your lenders and creditor with money worth less than it was originally borrowed. However, this advantage is only effective for fixed-rate loans. If history has taught us anything, inflation and higher interest rates go hand in hand. If you have an adjustable- or variable-rate loan, consider refinancing to a fixed-rate sooner rather than later.
Reassess your budget. We have less buying power during inflation as our dollar doesn’t go as far. Now is the perfect time to create or reassess your budget, focusing on the expense categories greatest affected by inflation such as food, utilities, transportation, and healthcare. Look into ways to stretch your budget further including shopping at less expensive stores or cutting back on non-essential expenses.
Invest in stocks. Investments - such as 401k savings and retirement plans - are one of the most effective long-term ways to beat inflation. If you’re able, consider adding more to your investment assets or shift your short-term savings (i.e., money markets) into longer-term, more profitable options. Remember to keep your emergency funds in a separate, accessible account should you need it.
Purchase a home. Real estate usually maintains or increases its value over time, making a financially-savvy way to beat inflation. When you rent, your landlord will likely raise your monthly rent at the level of inflation. However, if you own and have a fixed-rate mortgage, your monthly payment remains the same - thus protecting you from the effects of inflation. Plus, the replacement value of your home is likely to increase because the cost of land, materials, and labor are all rising with inflation. If you’re thinking about a home purchase or refinancing your existing mortgage, now is a good time to make your move.
You can’t control how inflation fluctuates. However, you can control your financial decisions and make choices today that will help you manage inflation going forward.
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