Inflation – the rise in consumer prices – is a slow erosion of your money over time. Prior to 2021, the United States had not seen annual underlying inflation well above 3% for nearly 25 years, says Michael Ashton, managing director of Enduring Investments, an investment and advisory firm in Morristown. , New Jersey.
For example, the 7.5% increase seen over the past year in the cost of fuel, used vehicles, groceries and just about everything else is the kind of sudden, systemic increase that can boost most people’s day-to-day expenses.
Ashton also says the COVID-19 pandemic stimulus checks and tax relief, combined with the reopening of the economy, have fueled consumer demand but not replaced product inventories. The result: shortages that lead to higher prices.
“Having difficulties in the supply chain is part of what inflation looks like,” Ashton says.
With inflation eating away at your purchasing power, how can you protect yourself?
REVIEW YOUR EXPENSES
— Cut discretionary spending, voluntary spending in categories like entertainment or travel, by just 5%. It’s one of those gradual changes that isn’t that hard to make and goes straight to your personal bottom line.
— Do not delay a major purchase; prices are likely to rise.
— Shop strategically. Buy more generic branded products and prescriptions. Save on necessary expenses by using coupons and in-store loyalty programs. Use membership cards (like Walmart+ and others) to pay 5 cents less per gallon of gas.
LOOK FOR SAVINGS
— Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). Many banks waive these fees, and credit cards often offer no-fee options.
— Renegotiate your cable, streaming or cell phone bill for possible savings.
“I can say from my own personal experience – it’s amazing how easy it is,” notes Ashton. He says that every time he called his cell phone provider, they would offer him a much better plan than the one he currently had. “And that only happens if you call,” Ashton adds.
He’s now making a habit of calling once a year and asking, “What’s the best plan you have and should I be on that?”
— Reduce the number of subscriptions you have, even just one.
“You should check on these once in a while, because sometimes they sneak in a price increase, and it just shows up on your credit card,” Ashton says.
TRY TO BRING MORE MONEY
— Look for financial institutions that pay higher interest rates than what you currently earn (if you earn anything). Online banks and credit unions often offer high-yield savings accounts that sweeten returns, especially when interest rates rise.
“Perhaps the most powerful idea of all: asking for a raise. If you haven’t received a raise in a few years, you’ve probably taken what amounts to a pay cut because of inflation, Ashton says.
THE INFLATION CORRESPONDING SAVINGS ACCOUNT
Another inflation-fighting idea: Series I savings bonds. They were created specifically to protect consumers’ purchasing power against inflation, says Zvi Bodie, professor emeritus of finance at the University from Boston. Bodie holds a doctorate in economics from the Massachusetts Institute of Technology and has become a strong supporter of Bonds I.
Bond rates are pegged to the rate of inflation, which recently topped 7%, he notes. They are a perfect haven for short-term savings. And it’s not a bad addition to your long-term nest egg, either.
A minimum investment in I bonds through TreasuryDirect.gov is just $25, and an individual can invest up to $10,000 per year in savings bonds with electronic purchases. Bonds pay fixed interest plus the rate of inflation, adjusted twice a year.
You can withdraw your savings without penalty after one year, but if you cash it out before five years, you will lose interest for the last three months.
“So what you get is basically a savings account that can’t go down, and will go up with inflation,” adds Bodie. “Do I need to say more?”
INFLATION IS NOT THE SAME FOR EVERYONE
Inflation hit a national average of 7.5% in January, but that probably won’t be your inflation rate, Ashton says.
You may consume different items than the average person and you may not live in an average place, so your particular inflation rate most likely varies from the average, according to Ashton.
So, rather than agonizing over a single number like losing purchasing power to recover, use the small money moves above to improve your financial situation slowly but surely.