Inflation is a term we hear quite a bit, but we may not fully understand what it means for us, or how it will affect our daily lives. But, as with any new idea you want to understand better, knowing is half the battle—and we have some info that can help you with the rest of the fight.
What is inflation?
Simply put, inflation just means paying more for the same goods and services. Your favorite brand of soda might go up a few cents, or going to the movies will likely take a few more bucks than you’re used to. If you’ve heard someone mention how cheap a carton of eggs used to be, you are familiar with inflation.
What causes inflation?
Inflation seems to be the result of a few different phenomena:
The “Demand-Pull effect” – the demand for a product or service is higher than the current economy was prepared to meet. Prices rise as more and more consumers seek out certain items (see: toilet paper in 2020), often resulting in prices above the market value.
The “Cost-Push effect” – this effect works in the opposite direction—it’s the cost of the production process or service that rises, which in turn is passed onto consumers. Keeping up with demand while low on supplies or with increased prices of supplies means the consumer pays more.
Built-in Inflation – when prices rise, those in the workforce need to increase their wages to keep up with the cost of living. It’s a cycle of inflation: prices rise, wages rise, and prices rise again.
Budgeting during inflation
One of the biggest ways to handle inflation is by updating your budget. While you know that your budget should be reviewed and updated as your life changes, you can’t forget to factor in external events like inflation. For example, if you currently depend on a medication that is going to cost more, you need to factor that into your budget. If your grocery bill will go up, you should also factor that into your budget. Here are some steps to make your budget go further:
Review your spending
Before you can make any adjustments, your first step should be to review your budget and look over your spending habits. Examine which parts of your budget have been the hardest to keep under control and if there are places you are overspending.
Find ways to save
Once you know how and where your money is being spent, it’s time to find ways to save. If grocery bills are hitting you the hardest, picking generic products, meal planning, and buying in bulk (when it makes sense) can help you reduce your costs. Save on transportation by combining your errands, carpooling when possible, or joining gas rewards programs.
Cut unnecessary expenses
When you reviewed your budget, you might’ve noticed services that you no longer use. Be sure to cancel any nonessential subscriptions or services. There may be other expenses you feel comfortable eliminating, either temporarily or forever, like cable television or a daily coffee habit.
How else can I reduce the impact of inflation?
Unfortunately, the effects of inflation are unavoidable and impact everyone—some more than others. Here are some other steps you can take if inflation affects you:
Take stock of your finances
If you’re worried about inflation and its effects, this is a great time to speak with a financial advisor who can help you determine the state of your finances and ways you can continue to budget and save. Getting an objective, professional opinion can go a long way in identifying potential danger areas and the places where you can grow your wallet.
Keep an eye on the job market
We’ve talked about how inflation means many earn higher wages, but it can also mean fewer jobs. If a company hopes to maintain its own budget while giving raises to some of its employees, there may be fewer jobs available. You don’t need to rush out and find a new job today— just keep your finger on the pulse of your own job while looking at options for others.
Know your home’s value
You may not be planning to move ever again, but it’s always a good idea to know the value of your home. This is a simple task—you can sign up for websites like Zillow that will give you an estimate of your home’s worth. Check out the value occasionally to keep in the back of your mind—you never know when that info could be useful, especially in the current housing market.
Check out your retirement plan
You or your partner are likely paying into a retirement plan already. While this is a great idea, you will want to take a look at the plan and see how inflation can affect your ability to save for the future.
If retirement is a long way off, you have a little more flexibility when it comes to making any changes. But, if you’re looking to get out of the workforce in the next few years, review your retirement account and make necessary changes to ensure your financial security. Consider discussing your options with a financial advisor so you can plan strategically.
Key Takeaways
- Inflation is when the prices of goods and services increase. Unfortunately, inflation affects everyone, though it may impact certain people harder.
- Review your budget to ensure you’re spending wisely. Cut unnecessary expenses and implement cost-saving tactics like meal planning to make your budget go further during inflation.
Inflation is a fact of life—but you don’t have to be afraid of it. Some of these changes may seem overwhelming, but you’ve already won half the battle with your new knowledge. Make a goal this week to sit down, review your budget, and determine your best next steps for keeping your financial security stable.
