Not all of us remember the 1980’s, but those who do might be experiencing some flash-backs, at least when it comes to paying for groceries, gas, or just about anything else. That’s because, as of mid-2022, inflation officially reached heights it hasn’t soared to since 1981.
Even with unemployment down and income growth up, inflation is causing many households to feel like they’re further behind. In fact, a Moody’s analysis estimates that the average increase in household expenses is around $300 or more per month.
In our 2021 Financial Literacy and Preparedness Survey roughly a third of U.S. adults reported that they were already “just getting by financially,” so the prospect of more price increases may seem overwhelming. But there are some key ways your family can adjust, and even save money, during this challenging time.
What is inflation?
Inflation refers to an increase in prices, and inflation rates are determined by looking at how much costs have risen for specific goods and services over a one-year period.
While it’s normal for prices to increase over time, inflation rates can change a lot from year-to-year. The Federal Reserve, which helps regulate inflation, aims to maintain a rate around 2%, but between March 2021 and March 2021 inflation rose by 8.5%.
When will inflation return to normal? The Federal Reserve is making moves to bring inflation under control, but things could still get worse before they get better. By some estimates, inflation will continue to rise through late summer of 2022, if not longer.
Four Tricks For Managing Inflation
Unfortunately, inflation can have an impact on lots of everyday expenses. But even if you can’t completely avoid paying higher prices, there are still ways to minimize the financial crunch. Here are some of the best strategies for dealing with inflation:
1. Consider (strategically) downsizing
Do you own any assets that are worth more as a result of inflation? If so, now could be a good time to get rid of them.
The best example of assets that have gained value is used vehicles. While cars tend to lose their value pretty quickly, supply shortages caused used cars to rise by more than 40% in value between January of 2021 and 2022. That means, for someone who has a car they don’t need, now could be a great time to sell.
Other items to consider selling include furniture, equipment, and recreational goods (e.g. toys and games) since these items have all seen major price increases due to inflation.
2. Reduce or delay certain purchases
In addition to cars, some other items have seen drastic price increases. You’ll want to avoid or reduce your consumption of these items for the near future, since they’ve seen the largest price increases:
- Recreational goods (e.g. toys and games)
- Furniture and home goods
With gas prices soaring by as much as 45% between March ’21 and ’22, you may want to consider consolidating weekly errands into one single trip, carpooling, or talking to your employer about working remotely as often as possible. You can also find more tips here for saving money on gas.
It’s a good time to cut back on certain non-necessities, too. The cost of buying food away from home is up by 6.9%, and some entertainment and travel expenses are exceptionally high as well. You don’t have to cut these costs forever, but instead take some time to save up cash that you’ll spend on entertainment or vacation when prices eventually drop.
3. Keep investing in your future
When money gets tight, it’s normal to focus on immediate needs and give up on long-term goals. You may even be tempted to stop saving for retirement. But U.S. adults already say their top financial concern is not having enough saved for retirement.
During this difficult time, keep in mind that contributing to retirement and other long-term investments can be one of the best ways to fight the effects of inflation. That’s because long-term investments help your money increase in value, and can even outweigh the effects of inflation. Even if inflation is high now, it historically averages around 3.2% per year, while 401(k)s historically earn between 3% to 8% a year.
4. Review your budget
When prices go up, it’s important to revisit your budget — which can be as simple as making a list with all of your monthly income and up-to-date expenses. The sooner you review your new situation, the sooner you can make adjustments and avoid getting into financial trouble.
Budgeting might feel like it’s all about cutting costs, but it’s also an opportunity to revisit your income and consider ways to bring in more money or resources. If you’re in need of a pay increase, keep in mind that in the post-pandemic employment market, many people are gaining bigger pay increases by switching jobs rather than staying with their current role/employer.
Here are some helpful questions to ask while you review your budget:
- What can I reduce or cut?
- Is there something I can put on hold, even if it’s just for a few months?
- Am I being charged for services I don’t use? (Tip: look at your bank and credit card statements for charges you can cancel)
- Can I negotiate or shop around for a lower price on expensive items?
- Am I eligible for any discounts or income-based relief?
- Is there a way I can temporarily or permanently bring in more money?
- Am I eligible for a pay raise or a promotion?
- Do I have a product or service I can sell?
- Am I eligible for any government benefits or other assistance?
- Can another member of my household earn money or qualify for financial assistance?
If creating a budget seems impossible, you’re not alone! Only about a third of U.S. adults say they have a plan for how they’ll spend each paycheck. Instead of avoiding the task, consider getting support from a professional. You can schedule a free appointment with an NFCC Certified Financial Counselor by visiting NFCC.org or calling 800-388-2227.