How to Manage Your Money During Inflation

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We're all aware that prices tend to go up over time. This increase in the cost of goods and services is known as inflation and plays a bigger role in your finances than you may realize.

It's pretty normal to see some amount of inflation from year to year, but the Fed tries to keep the inflation rate around 2%. A special committee—the Federal Open Market Committee—meets four times a year to discuss inflation and determine how to keep the economy growing at a healthy pace.

Maintaining a 2% inflation rate doesn't always happen. Most recently, June 2021 saw an inflation rate of 5.4%, the highest rate we've seen since summer 2008. If you made purchases over the summer, you probably experienced a bit of sticker shock, especially after almost a year with not much spending at all.

The trouble with inflation, especially a sudden spike like we've just experienced, is that it affects your cost of living by lowering the value of your money. There are some strategies for dealing with inflation in your own finances.

Adjust your budget.

Because prices have increased overall, you may not be able to buy as much as before. You may find yourself spending more on essentials, which means you may have to reduce spending on nonessentials like dining out, entertainment, and travel. Even when it comes to essentials, adjusting your spending choices and opting for less expensive products can help you fit more into your budget.

Invest your savings beyond your emergency fund.

Inflation erodes the value of your savings, especially over a long period of time. Since most savings account yields are below 1% right now, it's not the best place to keep money in excess of your emergency fund. Investing in assets that have an annual yield above (or at least close to) the inflation rate can keep your money from losing value.

Delay some purchases.

Inflation doesn't always affect all types of goods and services at the same time. If you can put off some purchases until prices normalize, you can avoid overpaying, especially when it comes to higher-ticket items, like vehicles or furniture. Used cars, for example, are 45% higher than last year. Another perk of waiting, particularly if you're financing a large purchase: you'll have time to work on your FICO® Score and potentially qualify for a more competitive interest rate.

Try to get a raise.

Inflation hurts your pockets more because wages don't necessarily increase at the same rate. Your $60,000 salary won't cover as much this year as it did last year. Earning more money would make it easier to adjust to higher prices, but of course, that depends on your job. A 5% raise wouldn't completely offset June's 5.4% inflation rate, but it would help. Now may be a good time to compile your performance details since your last raise and prepare for a discussion about your current salary.

Fortunately, the current spike in prices could be only temporary. In this case, the surge in inflation is a reaction to changes in supply and demand brought on by the coronavirus pandemic. As things return to normal, inflation may slow, but monitoring prices and making moves to protect your money will always be a sound decision

LaToya Irby

LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.