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How to deal with inflation as an individual 

how to deal with inflation

You can deal with inflation by increasing your purchasing power and investing your money. Reducing your expenses, increasing your income, and negotiating lower prices are excellent ways to keep more money in your pocket. While using a high-yield savings account, bonds and stocks could help you grow your wealth. In fact, 61% of Americans reported that they own stock through a Gallup survey.

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 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: 

MeasureDescription
Consumer Price Index (CPI)A measure that examines the average change in prices paid by consumers for goods and services over time. It represents the inflation experienced by urban consumers.
Producer Price Index (PPI)A measure that evaluates the average change over time in the selling prices received by domestic producers for their output. It provides insights into inflation at the producer level.
Personal Consumption Expenditures (PCE)A measure that assesses the changes in prices of goods and services consumed by households. It is a comprehensive measure that considers various consumption patterns.

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 financial plan. 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

What is a bond loan exactly? 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? 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 build an emergency fund or aggressively pay off 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 grocery shopping on a 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 light bulbs
  • 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. A debt consolidation loan could help you save on interest fees. Credit cards are notorious for having high interest rates. But you can use quick cash loans or installment loans 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 who 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! Luckily, there are plenty of ways to increase your monthly earnings and organize a working schedule outside of your part-time 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. 

FAQS

How can a high-yield savings account help me fight inflation?

A high-yield savings account offers higher interest rates compared to regular savings accounts, helping your money grow faster. This can be particularly beneficial when inflation rates rise, as it helps maintain your purchasing power.

With rising costs, should I focus on retirement savings or medium-term savings?

Balancing between retirement savings and medium-term savings depends on your personal finance goals. It’s wise to consult a financial advisor to create a plan that accommodates both, especially during times of rising costs and fluctuating interest rates.

Are online banks a better option for high-yield savings accounts than traditional banks or credit unions?

Online banks often offer higher annual percentage yields (APY) on high-yield savings accounts due to lower overhead costs. However, credit unions and some traditional banks can also offer competitive rates, especially if you maintain a minimum balance or use direct deposit.

How does the rise in food prices affect my personal finance strategy?

Rising food prices can significantly impact your monthly budget, reducing your ability to save. It’s important to adjust your budget accordingly, perhaps by allocating more to groceries and finding savings in other areas.

What should I consider when choosing a bank account during a period of rising interest rates?

When interest rates rise, look for bank accounts that offer favorable rates and terms. Consider accounts with no or low minimum balance requirements and those that offer benefits like direct deposit or linked checking and savings accounts.

How can I ensure my purchasing power isn’t eroded by inflation?

To protect your purchasing power, consider investing in assets that typically outpace inflation, like stocks or TIPS. Additionally, keeping money in high-yield savings accounts can also help mitigate the effects of inflation.

Are there any specific financial advisor services that can help with managing finances during inflation?

Yes, financial advisors can provide personalized advice on managing your finances during inflation. They can help with investment strategies, retirement planning, and adjusting your budget to cope with rising costs.

A Final Summary From CreditNinja on Inflation

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. For additional information on how to increase your wealth and save money, check out the CreditNinja Dojo! We offer free articles on almost every personal finance topic!

References:

  1. What Percentage of Americans Own Stock? | Gallup
  2. How Inflation Erodes The Value Of Your Money | Forbes

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