Inflation affects almost everyone by increasing prices throughout the economy, but it doesn’t have to be scary. There are steps you can take to save money, lessen inflation’s impact on your finances, and help ensure a stable financial future.
What is Inflation?
Inflation is the rise in prices over time, which lowers your purchasing power.
Purchasing power is how much a certain amount of money can buy on a specific day. The purchasing power of $100 today could be shown by the amount of groceries it can buy.
Picture this: you could buy two carts of groceries with $100 in 1989, but can only buy one cart of groceries with $100 today. That is inflation. Prices rise, and the amount of goods and services your money can buy, or its purchasing power, decreases over time.
Usually, a small amount of inflation is considered normal, even healthy, for the economy. That is because, as demand rises—meaning people are spending money and the economy is growing—prices increase. Severe inflation is harmful, though, and is called hyperinflation.
Is Inflation Bad?
Inflation makes products and services more expensive. With recent high inflation rates, your grocery, power, and entertainment bills are probably higher now than they were at this point last year.
In times of high inflation, many people dip into their savings accounts to cover necessary costs. People with lower income might not be able to cover costs at all, incurring debt.
People spending less affects businesses too. Smaller businesses might be forced to shut down, and those that remain may stop offering more expensive goods or services. For example, a local diner’s popular two-for-one deal might disappear during a time of hyperinflation.
What Can I Do About Inflation?
The good news is that you are not powerless against inflation. There are several ways you can help lessen the impact of inflation on your finances.
1. Decrease Unnecessary Spending
When prices rise, what once may have been a harmless purchase has more of an impact on your bank accounts. Think critically about what you spend your money on and determine if it is truly worth the cost. A good rule-of-thumb is to wait at least three days before making a big purchase. This helps to prevent impulse buying.
You do not have to completely stop spending money for fun. Instead, try to cut back on paying higher prices for unnecessary goods and services during a time of inflation. This will help protect you by leaving money in your budget which you can save for emergencies.
2. Decrease Necessary Expenses
When inflation is high, every bill counts. While many of your expenses, such as energy bills, cable, loan payments, and more, are necessary, there are still ways to save.
For example, look at your energy consumption. Consider reducing your AC or heating use, which should lower your energy bills. Also, check if your bills have any unnecessary add-ons, such as premium cable channels, that you can cut back on.
Additionally, you can refinance loans, which means receiving a new loan with different terms and conditions, and save money by lowering your monthly payments, receiving a lower interest rate, and more.
Saving on necessary expenses will help you offset increased costs and allow you to save more for emergencies.
3. Purchase Quality Goods
High-quality products are less likely to wear down. Even if they are a little more expensive, you will spend less money over time by not having to replace these items frequently. Think about what you buy and try to get products built to last.
4. Make an Emergency Fund
An emergency fund can help you and your family handle unexpected events, like a high-cost medical emergency or an air conditioner breaking in the middle of summer.
In times of inflation, these emergencies can be devastating, because prices are high. Having a savings cushion can prevent an emergency from negatively impacting your finances.
If you cut back on unnecessary spending, and work to lower necessary costs, you will already have money that you can put into an emergency fund. Creating a thorough budget will also help you save up.
It can be tricky to save money during times of inflation. If you regularly save what you can, though, even if it is a small amount, your emergency fund will grow over time and help prepare you for the unexpected.
5. Create a Budget
If you have a budget, you are less likely to spend more on unnecessary expenses, and more likely to save up for emergencies.
Make a list of your income, unnecessary expenses, necessary expenses, and how much you can realistically save on both. Use a pen and paper, a spreadsheet, software, or whatever is most comfortable for you.
Even if you already have a budget, review it. Make sure to determine how much of your spending you can cut back on and how much you can save every month.
With Credit Union 1 Digital Banking, you can set up a personal dashboard and make a budget with cutting-edge tools to help you spend less and save more— register or log in today.
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