Personal Finance Do’s and Don’ts During Inflation

Knowing what inflation is, and how it can impact your life, is critical to helping you protect your money and make smart decisions to secure your financial future.

The Consumer Price Index (CPI), which measures changes in the cost of consumer goods, found that the rate of inflation increased by 4.3% from May 2022 to May 2023. And while the rate of inflation seems to be slowing down, it’s still higher than it has been. From 1960 to 2022, the average inflation rate was 3.8% per year – half a percentage point lower than it is now.

With that said, here’s why inflation matters, and what you should – and should not – do to protect yourself from inflation.

Why Does Inflation Matter?

Inflation is the rate – expressed as a percentage – at which the cost of different products and services rises. It impacts nearly every economic area of life.

While a slow and steady increase of inflation can be a good thing as it shows economic growth, high levels of inflation can be problematic on an individual level. Here are some of the main reasons why inflation matters to your personal finances:

• Higher interest rates: Rates for things like credit cards, mortgages, and other loan products tend to rise with inflation. When inflation is high, interest rates are often higher, too. Essentially, that means that you're paying more to borrow money.
• Higher prices of services and goods: With inflation comes the rise of costs. This includes things like groceries, transportation, medication and entertainment. If your income doesn’t rise to match the inflation rate, you may struggle to afford the rising cost of living.
• Limited purchasing power: In periods of high inflation especially, your purchasing power – that is, how much stuff your money can buy – weakens. What this means is that the value of your money doesn’t go as far as it once did. This can make it harder to afford essentials and nonessentials in life, which can also affect your quality of life.
• Limited savings or investing potential: It’s harder to set aside money for emergencies, vacations, retirement, investments, or other big-ticket items when your purchasing power decreases. This is especially common amongst those living on a lower income.

Review your income, diversify your investments, pay down high-interest debts, shop strategically, and don’t be afraid to negotiate for the things you need.

Inflation Personal Finance: What to Do With Your Money

While you may already have a solid financial plan for your future, it’s important to pivot your personal finance strategy during times of inflation.

Here are some considerations for managing your money during inflation as well as some ways to protect yourself from inflation:

1. Pay down high interest-debt. Interest rates increase with inflation, so it’s a good idea to start paying down your high-interest debts as soon as possible. This will protect you from losing money in the long run to interest charges on things like credit card payments.
2. Find additional income streams. If you’re not making enough money to cover your monthly costs, another helpful protection from inflation method is to take on additional work. This could mean getting a side hustle or asking for a promotion. Or, it could mean selling products online on sites like Facebook or Etsy. 
3. Diversify your investments. Consider investing in low-risk assets like Treasury Inflation-Protected Securities (TIPS). These are designed to ensure you don’t lose the money you invest. You’ll either see a positive return on your investment, or you’ll get back the money you put in. Other low-risk investments include money market accounts, certificates of deposit (CDs), and exchange-traded funds (ETFs). If in doubt, speak with a financial advisor about your options.
4. Open a high-yield savings account. This is similar to a traditional savings account, but it comes with a higher yield, meaning your money will accrue interest faster. Many online banks offer high-yield savings accounts. Some are offering interest rates of 4.5% APY. Compare a few options to see which one offers the best yield and what types of fees they have. And if you already have a high-yield savings account, consider using some of that money to pay down high-interest debts or start investing in low-risk assets.
5. Shop smarter. Learning how to budget during inflation is vital to ensuring your family’s financial stability. Before you go shopping, create a realistic budget and make a list with the essentials. If you’re not in a rush, compare prices at several locations or wait for things to go on sale. Also, switch to generic goods rather than brand-name ones. 

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Inflation Personal Finance: What Not to do With Your Money

Many strategies can help offer protection from inflation, as well as get you closer to financial stability. But there are also several things you should not do when it comes to managing your personal finances, especially during periods of high inflation. Here are the main ones:

1. Put off high-priority purchases. You should prioritize your spending so you can pay down expensive debts and cover everyday necessities – that is, things like rent, food, gas, or utilities. But if there’s a large purchase that's critical, like a roof replacement, you might want to get it sooner as opposed to later. That’s because the prices of these items are likely to continue increasing each year. The longer you put it off, the more you’ll end up paying for it. Just make the expense fits into your budget.
2. Shop without a plan. According to research, the average consumer spends over $300 on impulse buys each month! It’s easy to overspend when you shop without a plan, which is why you should always make a list. Try to follow that list exactly so as not to buy more than you should. You can even try leaving your credit cards at home and going just with cash. 
3. Rely too heavily on driving. A gallon of gas costs, on average, $3.578. This is lower than it was 12 months ago, but it’s higher than it’s been in the past couple of months.  If possible, switch to public transportation. Not only is bus or metro fare cheaper than filling up at the pump, but it could also save your car on general wear and tear.
4. Hoard cash. When money’s tight, it might be tempting to hoard as much cash as possible. But this can have an adverse effect on your personal finances. That’s because cash loses purchasing power – or value – during inflation. Instead of hoarding your cash, consider putting the funds in growth investment vehicles like ETFs or high-yield savings accounts.
5. Fear negotiation. You’d be surprised at the power of negotiation when it comes to things like your employer, credit card company, or service providers. For example, you could ask for a raise at work. Start by determining how much more money you need and the current rate of inflation. Then, figure out what the average pay rate is for your position. After that’s done, lay it out for your employer and ask for a raise based on what you need. You can also negotiate with your insurance company, utility providers, or credit card companies to try to lower monthly payments, interest rates, or premiums.

Bottom Line

When it comes to the economy and personal finance, inflation matters across the board. Fortunately, there are ways to protect from inflation for both your family and you. Review your income, diversify your investments, pay down high-interest debts, shop strategically, and don’t be afraid to negotiate for the things you need.

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