How to deal with inflation and better manage your budget

By Izzy M
Modified on April 26, 2023
how to deal with inflation

Inflation is affecting everyone, and unfortunately, the cost of living keeps increasing. The good news is that there are several ways to make your money go further! No matter how little you have, you can use financial strategies to increase your purchasing power. Learn how to deal with inflation and establish a budget plan below! 

What Is Inflation?

The word inflation gets thrown around, but what exactly is inflation? Inflation occurs when prices of goods and services across a sector rise and the value of your money decreases. For example, in previous years you could get more with your money. The average ticket price was $2.89 in the 1980s, but now it’s about $9.16. 

These are the three main measures of inflation in the United States: 

  • The Consumer Price Index (CPI)
  • The Producer Price Index (PPI) 
  • The Personal Consumption Expenditures Price Index (PCE)

These indexes use various measurements to track consumer and producer prices across multiple industries. While inflation seems like a disastrous economic issue, a low to moderate inflation rate can actually be a good sign for the economy. Consumers may be encouraged to invest and spend their money when inflation is manageable. Consumer spending, in turn, boosts economic growth. 

The best way to beat a period of higher inflation is to invest your money and stick to a budget method. Since you need more money to afford various goods and services, it’s time to make your money work for you! 

How to Invest Your Money to Combat Inflation  

Investing your money is an effective way to earn more without actively doing anything. Investments can help consumers grow wealth and combat inflation. There are several investment options, but only four can help you avoid losing purchase power. 

Combat High Inflation with Stocks

Investing in the stock market is a smart financial move in this inflationary environment. Broad stock market indexes, such as S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, typically rise over time. However, it’s best to avoid individual stocks during an inflationary period. Individual stock prices can fall unexpectedly, and shareholders can lose money when companies go bankrupt. In addition, bear markets can fluctuate greatly. 

Diversifying investment in a broad market index fund can help combat rising inflation. History shows that investments in significant stock market indexes provide a higher long-term average. However, it’s best to consult an experienced broker if you have limited financial knowledge. 

Get Inflation Protection with Bonds

A bond is a specific type of loan that is tradeable. Bonds are fixed-income securities because many options guarantee interest payments to the bondholder. As a bondholder, you can receive interest payments monthly, semiannually, or annually. 

Bonds typically offer lower returns than stocks but provide more consistent payments. If you want a low-risk investment option, consider bonds during a period of inflation. However, remember that bond yields can lose purchasing power since they depend on the economy. 

Combat High Inflation Rates with Treasury Inflation-Protected Securities

A sound investment option designed to protect investors from inflation is a Treasury Inflation-Protected Security (TIPS). Treasury Inflation-Protected Securities automatically adjust the value of your investment based on the Consumer Price Index (CPI). The value of your treasury bond can increase with the inflation rate, and you can receive interest payments. 

Use Gold

Many financial experts consider gold to be a valuable inflation hedge. Why? Because historically, gold tends to hold its value despite fluctuating prices. That being said, gold prices are as unpredictable as stock prices. Various outside forces, such as supply and demand, the New York Fed, and global currencies, impact the cost of gold. There are better alternatives if you want a low-risk investment option to build wealth. 

Look Into I Savings Bonds

Series I Savings bonds are government bonds that offer decent interest rates and are relatively safe from inflation. How? The yield of I Bonds cannot dip below zero! Series I Savings bonds are a government bond option that can help you earn interest for up to thirty years. The downside is that you must hold I Bonds for at least five years or forfeit three months of interest payments.  

How to Increase Purchasing Power to Beat Rising Inflation 

You may be familiar with the financial proverb, “Spending is quick; earning is slow.” To make the most of your money, consider using a budget method or cutting costs to counteract rising prices. In addition, starting an emergency fund can help make your money grow and cover the cost of any emergency expenses that pop up. 

Cut Down on Unnecessary Monthly Bills

Everyone has a few unnecessary bills they pay each month. Take a look at your monthly expenses and cut down on bills you can easily live without. Consider dropping any subscriptions for premium audio or video streaming services. It’s annoying to listen to ads and watch commercials. However, you can still access the same content without paying hundreds of dollars a year. 

Many people have costly gym memberships but only go a few times a month. The average gym membership is about $40, which equates to $480 a year! You can use that extra money to start building an emergency fund or aggressively pay down credit card debt

Reduce Your Expenses

Look for ways to reduce your monthly expenses to have more money at the end of the month. Try creating and sticking to a grocery shopping budget to save money on food. If you have an apartment or home, try reducing your water usage and energy costs to save money. 

Simple ways to save on utility costs include:

  • Taking shorter showers
  • Switch to energy-efficient lightbulbs
  • Enroll in time-of-use and peak time savings plans if available 
  • Turn off all lights and unplug electronics when not in use
  • Eat meals that don’t require your stove or oven

If you have a lot of credit card debt, consider consolidating to save on interest fees. Credit cards are notorious for having high-interest rates. But you can use fast cash loans online to get an affordable interest rate. Plus, you can decrease the amount of bills you pay monthly!

Use Coupons and Discounts

Many retailers and companies offer coupons or discounts for consumers. Check if your preferred grocery store has a mobile app you can download. You may be able to see what’s on sale and electronically clip coupons. Planning your weekly meals around what’s on sale can help you save a significant amount of money! Meat is always the most costly part of a meal, so consider eating vegetarian or vegan meals every once in a while. 

Many companies also offer discounts for customers that sign up for automatic payments. For example, Metro PCS deducts $5 from every monthly phone bill when you sign up for autopay. That saves you $60 every year! Just ensure you have sufficient money in your bank account when bills are due. 

Negotiate Lower Prices

If you own a car and the renewal date on your insurance is approaching, shop around for lower prices. Many people work from home now and don’t use their vehicles frequently. You can leverage your low annual driving mileage and accident-free driving history to get a low-cost policy. 

Remote workers should also consider switching phone companies or downgrading their service plan. If you’re home most of the time, you likely don’t need unlimited data when you can connect to the WiFi. Many phone service companies offer deals on new phones for customers who switch. If you have an older phone model that doesn’t work as it should, now may be the time to upgrade. 

Postpone Large Purchases

Due to rising prices, it may not be an ideal time to make an enormous life-changing purchase. If you were considering real estate investments, it might be best to hold off. Mortgage rates are still relatively high, and many homes listed for sale have sky-high purchase prices. If you look at articles online, you will easily find a certified financial planner or financial planning firm advising consumers to postpone purchasing a home. 

Increase Your Income

Increasing your income helps you get more money to spend! And luckily, there are plenty of ways to increase your monthly earnings and organize a working schedule outside of your part or full-time job. If you have access to a vehicle, you can try delivering groceries, takeout orders, or store purchases. You can walk dogs or house-sit pets while their owners go on vacation. 

You can also consider donating plasma a few times monthly! Plasma is an essential liquid part of your blood that helps the human body recover from various injuries and infections. You can help save lives and get a little pocket money at plasma donation centers across the United States. 

The Bottom Line

Rising inflation is making the everyday worker’s life that much more stressful. Now more than ever, increasing your financial literacy and reevaluating your expenses are essential. The good news is that there are plenty of ways to combat inflation. You can cut bills, reduce costs, increase your income, and invest your money! Consider how you want to improve your personal finances and start making your money work for you.

How Inflation Erodes The Value Of Your Money│Forbes

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