By Due. Originally published at ValueWalk.
No, you aren’t imagining things. Everything costs more than it did before, and these higher prices make it hard to balance the budget while saving and thinking about retirement. But you can stop inflation from deflating your savings!
In April, the Bureau of Labor released the latest data from the Consumer Price Index (CPI), revealing inflation’s steady creep upward hasn’t stopped yet. The rate of U.S. inflation climbed to a whopping 8.5% in March, marking this spike as the most significant increase in the cost of living in 4 decades.
You aren’t alone if you’re struggling to handle prices at their 40-year high. Nearly half of Americans (45%) polled by Gallup last year admitted inflation caused financial hardship at a time when the CPI was just 6.8%. Moreover, of those that reported facing difficulties, 10% revealed their challenges impacted their standard of living.
While the Federal Reserve claims inflation’s bubble will pop soon, experts anticipate the CPI won’t fall below 4% by the year’s end. That means you can expect another year of high inflation bumping up prices.
Is your budget ready? If not, don’t panic. Instead, keep reading to understand more about inflation and what you can do to protect your savings.
Inflation: An Overview
Inflation is not a product of the pandemic, although it may initially seem that way. On the contrary, between lockdowns and labor shortages — and now the Russia-Ukraine crisis — the past 3 years have kept inflation well-fed.
These special circumstances allowed inflation to grow to dizzying heights, but it’s been around a lot longer than COVID.
Have you ever heard your dad tell you a story about buying a bag of candy for a nickel, only for your grandfather to chime in to say he bought the same thing for a penny? They aren’t just yearning for the good old days of their youth. That’s inflation at work.
Inflation is an economic principle describing how the prices of goods and services generally increase over time. Another way to think of it is how your money — or what’s called your purchasing power — decreases in value as time goes on.
Usually, inflation only increases by around 2% each year. And if you’re lucky, your employer matches this increase with an equivalent raise. This zero-sum game means a lot of people may not notice inflation. Sure, things cost more, but you also earn more, so it all evens out.
The problem with today’s record-breaking inflation rate is that prices are climbing far too fast for wages to keep up. While employers have been handing out raises, a survey shows they averaged 3.4% in 2021, less than half of today’s current inflation rate.
With inflation and wages out of balance, you may notice how your dollar doesn’t stretch as far as it used to before the pandemic. Each expense takes up more of your very finite budget as a result.
Americans Are Living Paycheck to Paycheck
Now that everything costs more, many Americans are feeling the financial crunch. According to CNBC, nearly two-thirds of Americans (64%) live paycheck to paycheck today. This isn’t necessarily new. In fact, survey after survey has revealed people have been living this way for nearly a decade.
If you’re living paycheck to paycheck, most, if not all, of your monthly income goes towards making ends meet. With your income tied up with bills, you may have practically no cash for anything else.
Your Paycheck May Not Go As Far – But Don’t Deflate Your Savings
It’s hard to keep up with your savings goals when you live like this. You might even hit pause on savings altogether. And without contributing to savings, Americans increasingly turn to credit cards and short-term personal loans for help in an emergency.
CNBC reports that 56% of Americans could not handle an unexpected $1,000 expense with savings. Most of those without savings would charge credit cards or ask a loved one for some help. But others would go into debt and borrow money online via short-term personal loans to cover unexpected expenses.
While credit cards and short-term personal loans function as emergency backups in unexpected cash crunches, they’re meant as temporary stopgaps for singular expenses. Moreover, borrowing money won’t solve the issue that high inflation is an ongoing problem that will long outlast most cash advances and personal loan terms.
More still, debt can add to your money troubles. If you’re already living paycheck to paycheck, you may not have the cash available to repay your personal loan on time. Late fines and extra interest are soon to follow.
Updating Your Budget with Inflation in Mind
Americans point to high costs preventing them from saving as much as they want, regardless of whether they rely on credit cards or short-term personal loans as crutches.
Unfortunately, there’s no telling just how long high inflation will hang around. Still, one thing is for sure: a higher-than-normal inflation rate will affect prices for the foreseeable future.
Higher prices are the new normal, so it’s time to tweak your budget, updating it for another expensive year. Let’s dive into how you can do that.
Make a List of Priorities
When things are tight, you need a plan of action to understand your next move. So sit down and write out your list of priorities. These expenses are the absolute essentials you need to pay each month to keep a roof over your head and food on the table.
Besides housing costs and groceries, this list may include insurance payments, utilities, basic household items, and toiletries. In addition, the minimum payments for personal loans, cash advances, and lines of credit also belong on this list. These minimum payments will help you avoid late fines, extra interest, and credit damage.
This list shows the bare minimum for what you need each month. It serves as a good reminder of what you need to pay first before moving on to other things.
Cut Discretionary Expenses
As judge, jury, and executioner of expenses, you should be looking to slash non-essential spending until you have more wiggle room in your budget. Then, the unnecessary expenses (i.e., those you don’t need to lead a safe or comfortable life) should be on the chopping block.
Which expenses didn’t make it on your list of priorities? It can be daunting to say goodbye to the fun things in life, but it’s easier to let go knowing it won’t be forever. You can reintroduce the non-essentials when you start to feel less pressure.
To help you get started, here are some discretionary expenses you can cut:
- Streaming services: If you have multiple streaming subscriptions, pare them down to the one you use most often.
- Subscription boxes: While the average subscription box doesn’t cost a lot, it may be too much if you’re living paycheck to paycheck. Put them on pause until you have more wiggle room in your budget.
- Gym memberships: The average gym membership costs about $600 a year. You can pocket that change by switching to a free at-home workout.
- Takeout: According to The Fool, the average American spends $2,375 on takeout a year. If you eat out multiple times a week, you stand to save a lot by eating at home.
- Alcohol: Happy hours after work and wine with dinner add up. Going dry can help you free up more cash for bills.
Finding it hard to say no when you’re out and about? Apply the 30-day rule. In other words, wait for 30 days before you commit to the purchase. A month is long enough to take the wind out of your sails, revealing the splurge for what it is: a waste of money.
Even at this time, savings are an essential part of your budget. It can help you weather unexpected emergencies, reducing how often you tap into credit cards and short-term personal loans.
Admittedly, saving through high inflation is challenging, so you might want to ignore the usual advice to save 3 to 6 months. But, that’s a goal for another day.
For now, save as much as you can to get started, even if it’s just $10 a month at first. Financial advisor David Ramsey suggests lowering your goal to $1,000 when you’re first starting out.
Tweak Your Phone and Internet Package
Having a phone and access to the Internet is as close to essentials as possible nowadays. You might need them for work, or it may be the only way you can contact the outside world. So cutting these expenses for the sake of saving money just doesn’t make sense.
If you’re on an unlimited plan, consider downsizing to a cheaper plan with strict data and talk limits. Be careful not to exceed these limits to ensure you aren’t penalized. You stand to save even more each month if you can stomach a prepaid contract.
Update Your Insurance
Like your phone and Internet packages, insurance is another essential with some wiggle room. But first, you’ll want to do some research. Go online to compare other insurance companies to see what they offer. Then, when talking to your current provider, you can leverage this info to know if they’re willing to match the competition.
Another thing you can leverage is your loyalty. If you’ve been with the company for a long time, bring this history up while talking to your provider. They might be willing to cut you a better deal knowing you’re thinking about jumping ship.
You may also get a better deal if you’re willing to bundle your life, home, and auto insurance under one company.
Eat Better for Less
Putting food on the table has never been more expensive. But, unfortunately, you can’t precisely cut groceries from your budget!
Meat and dairy have been some of the hardest-hit items in the grocery stores, with bacon, eggs, and beef taking most of the brunt. Now that bacon is 26% more expensive per pound than last year, you might think twice about including it on your breakfast plate.
Plant-based eating promises some financial savings at the grocery store, especially if you stay away from costly prepared meat replacements. Instead, focus on tried-and-true cheap ingredients like lentils and rice.
Following a meal plan is also another great way to keep your spending in check at the supermarket. Make a list of meals you want to eat every week, adjusting your plan for weekly flyers and coupons.
Use Less Energy
Your utility bills are taking a bigger bite of your budget, like electricity, water, and gas cost more. According to the Guardian, utility prices in the U.S. rose by 33% last year.
Reducing energy consumption across these utilities can help you control runaway expenses.
One of the biggest things you can do to save is set your thermostat according to the Department of Energy’s recommendations. These tips can help you save as much as 10% of your annual heating and cooling costs.
Summer: If you have an air conditioner running, set it to 78°F when you’re at home. Try increasing the temperature as high as you feel comfortable when you’re out.
Winter: During the cooler months, try to keep your thermostat to 68°F while you’re at home, reducing it even lower when you’re at work or in bed.
Reduce Your Fuelling Costs
Between inflation and the Russia-Ukraine crisis squeezing the American fuel supply, drivers can expect to spend more at the pumps. If you can’t reduce how often you’re behind the wheel, you should download an app like GasBuddy to find the lowest gas prices in your area.
More often than not, this ends up being Costco, but they don’t get a membership just to qualify for their gas. So you probably won’t save more at their pumps than what it costs to become an annual member.
Another way to keep your driving costs low is by using gas station loyalty cards so that you can redeem points as often as possible. You can also consider carpooling with local friends and colleagues to share the burden of driving.
Learn How to Negotiate
The art of negotiation is a hard-earned skill that can do wonders for your budget. Depending on your strategy and your creditor’s policies, you can push out due dates to take the pressure off your budget and reduce what you owe.
If you aren’t sure how to persuade big companies, check out this script for guidance. When it comes to medical expenses specifically, ask if they offer a financial plan that offsets your costs. In many cases, healthcare businesses are willing to give you a discount if you offer to pay the reduced amount in full immediately.
Investigate Financial Assistance
Let’s face it — juggling all your bills as inflation nudges them higher, and higher is hard. Sometimes, not even your best attempts at negotiating bills and saving money at the grocery store will be enough to help you balance your budget.
Reach out to a free credit counseling organization for advice. They can provide more significant insights into how to shrink your budget. But more importantly, they can direct you towards government assistance programs that help you offset the burden of your living expenses.
The Takeaway for :
Although inflation is beyond your control, there are ways you can get back in the financial driver’s seat. As prices continue to rise, your budget is your most crucial resource throughout it all. You can refer to this spending plan to understand your priorities and focus on areas of your spending that need work.
You can reduce your monthly spending and save more, whether it’s unnecessary splurges or excessive fuel spending. Keep these tips in mind for the rest of the year.
But more importantly, know that you aren’t alone in facing these prices. There are resources you can fall back on for more guidance if you can’t balance the budget, no matter how hard you try.
Article by Pierre Raymond, Due
About the Author
Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.
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