What are the effects of inflation?
Inflation is a sustained increase in the price of goods and services, which is measured in price increases over set periods of time. It’s a natural and sometimes necessary part of economic growth but can make goods and services more expensive. The government can help control the pace of inflation by reducing the money supply and raising or lowering interest rates.
How does inflation affect your finances?
Everyone’s financial situation is unique, and so are the ways that inflation will affect them. Most people won’t be able to buy as much as they were able to before simply because everything is more expensive. You might avoid high-price items and non-essential purchases, reduce your living expenses or get another job or side hustle. Inflation can also affect your savings and investments.
How to manage your finances during inflation?
Here are four ways to help you make decisions while limiting the effects of inflation on your finances.
- Stay informed.
- Buy now or buy later.
- Set a budget.
- Higher return investments.
Stay on top of the situation as it’s changing by looking at the Consumer Price Index. Sudden changes could affect your strategy, so be ready to adjust your course. Watch out for signals of the Federal Reserve raising interest rates and other government responses.
Buy now or buy later
Don’t overspend on items that won’t keep their value or utility. Stocking up on non-perishable foods and other supplies can help you save money in the long run. Consider waiting for prices to come back down before making large or luxury purchases.
Set a budget
Compare your living expenses with your income to make sure that you have enough to get by during periods of uncertainty and tighter funds. Create and stick to a budget, and expect to pay more in categories like food, utilities and fuel. Continue saving money for things like retirement or your first home, but factor inflation into your financial strategy to see if you need to make changes to your plans.
Look for investments with higher returns
Investments with strong growth rates can help offset inflation’s effects. Some people invest money in individual stocks or exchange-traded funds to pick companies that are likely to withstand economic downturns. All investments come with some risk, but diversified funds tend to be less volatile than individual stocks. You can also invest in assets that will maintain or grow during inflation. Your financial advisor can help you decide on an appropriate strategy for your money.