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Inflation is eating away at your money. Tea February CPI inflation report shows that the price for goods and services has increased 7.9% from the same time last year, the highest inflation rate since January 1982.
American households are feeling the strain of rising prices on their finances. The majority of respondents in a recent Forbes Advisor-Ipsos Consumer Confidence Biweekly Tracker are either very concerned or somewhat concerned about rising gas prices, inflation and grocery bill increases.
With the Russian invasion of Ukraine compounding ongoing Covid-19 supply chain disruptions, experts warn inflation is here to stay for the foreseeable future—making now a good opportunity for consumers to rethink their overall financial strategy.
How to Reevaluate Your Finances During Inflation
If you’re finding your money spread thin these days, you’re not alone. Forty percent of adults say their families are worse off financially now than prior to the pandemic, according to a recent survey by the New York Times and Momentive.
If your spending allowance isn’t lasting as long as it used to, or you’re starting to feel jittery about your investment portfolio, take these five steps to rethink—and adjust—your financial plan.
1. Know Where You Stand
Before you start revamping your finances, you’ll want to know where you personally stand with inflation; calculating your personal inflation rate can help you do this.
A personal inflation rate is more specific than the national inflation rate routinely cited in headlines. If you’re someone who doesn’t consume a lot of meat, for example, then you’ve managed to avoid purchasing products with some of the highest price increases to date. If you routinely eat takeout or dine at restaurants, you’re paying more for each order than you did a year ago.
To calculate your personal inflation rate, subtract your monthly spending from a year ago from your current monthly spending. Then, divide that difference by your monthly spending from a year ago. For example, if your current monthly spending is $2,500, and was $2,100 a year ago, your personal inflation rate is 19%.
Your personal inflation rate will help you contextualize why it feels like your money isn’t stretching as far as it used to—and can motivate you to cut out any unnecessary spending or fees in your budget.
2. Get Smart with Budgeting
Once you understand your spending and your personal inflation rate, it’s time to get back to budgeting basics.
A budget is what creates a solid foundation in anyone’s financial plan. Even if you don’t follow your budget down to every single dollar, knowing what money comes in—and goes out—each month will help you identify opportunities to stretch your income further.
Budgeting for inflation requires going through your budget with a fine-toothed comb and looking at each section from a savings perspective. Look at your debt repayment category: Are there opportunities to save money on interest payments, either by consolidating credit card debt into a 0% balance transfer or personal loan with a lower fixed rate?
For example, transferring a $4,500 credit card balance with a 14% interest rate to a 0% balance transfer card with a 2% balance transfer fee can save you nearly $1,000 total (assuming you pay off your balance within the 12-month introductory rate period ). Most 0% interest balance transfer cards are usually only offered for consumers with very good or excellent credit, so this strategy won’t apply for everyone.
Read more: Balance Transfer Calculator
If you’re an avid credit card user, you can easily lose control of your budget while swiping your card for everyday purchases, especially if you don’t pay close attention to increases in costs over time. Studies show that it’s easier to overspend with credit cardssince it eliminates the physical process of handing over cash, making it difficult for consumers to truly understand how much they’re spending.
It’s possible to maintain your budget while using credit cards, though. For example, you can create a monthly spending limit and set up notifications that update you when you’re close to that limit. You can also stockpile any rewards or cash-back earnings to redeem during a month when unexpected costs arise, so you don’t have to dip into your emergency fund to cover the tab.
3. Cut Unnecessary Fees
Inflation is already taking a chunk out of your income; don’t let miscellaneous fees bite into it, too.
Almost all financial products charge fees, from credit cards to bank accounts to prepaid debit cards. While some are unavoidable, you can eliminate some fees from your spending.
Credit cards, for example, can come with a flurry of fees, including late fees, returned payment fees and over-limit fees. Avoid these by paying attention to the fine print in your user agreement, how much you’re spending on your card and when your bill is due.
Annual fees on credit cards are another story. In some cases, expensive annual fees on rewards cards can essentially “pay for themselves” if you take advantage of all of the card’s perks, like spending a significant amount of time in airport lounges.
But if you’re someone who travels maybe once a year, that travel rewards card with a hefty fee might not be worth paying for, and you should consider canceling it. Keep in mind that closing credit accounts can temporarily ding your credit scores.
But you could still fall victim to fees if you primarily use a debit card tied to your checking account. The average overdraft fee is $25, according to Forbes Advisor’s 2021 checking account fees survey, and some banks charge more than $5 per month just to maintain the account. If your checking account is continuously charging you high fees, consider switching to an online bank or credit union; both tend to charge fewer fees. In 2022, Citi® became the first major US bank to eliminate overdraft fees entirely.
Some banks will even charge monthly minimum balance fees on checking accounts, meaning if you don’t keep a minimum amount of money in the account, you’ll be charged. This can be particularly painful if you’re living paycheck to paycheck. This list of no-fee checking accounts includes multiple options without monthly balance requirements.
4. Stay the Course With Investments
Now that the Federal Reserve is increasing rates in an effort to tame inflation, investors are getting shaky. You might be tempted to tinker with your investment portfolio during the volatility—but you shouldn’t. The general rule of investing still applies: Stick to your long-term plan.
You likely want to stay invested in stocks during these uncertain times, especially in your retirement accounts. While 401(k) loans are an option if you need immediate funds, taking a loan out now means you’ll miss out on compounding interest for the future.
These loans also come with risks. If you quit your job, you’ll be on the hook to repay the loan by Tax Day, or it’ll be considered an early withdrawal subject to taxes and a penalty.
5. Keep Up With Your Savings
Times of high inflation may have you wondering if now is the time to cut back on your savings. But doing so could leave money on the table.
The Federal Reserve is expected to increase interest rates as many as six times this year to try to curb inflation. Savings account rates may not immediately jump up, but banks will eventually be pressured to increase interest rates on savings accounts. Getting into the habit of saving now means you’ll have more money for compounding interest once rates increase.
If you already contribute to savings goals, now could be a good time to evaluate them. If you’re falling short on cash to spend each month due to increased prices, can you elongate your savings goals by a few months?
Keep in mind that all financial journeys are a marathon, not a sprint—and now could be your chance to find a new pace.