5 Ways to Rethink Your Finances for Inflation – Forbes Advisor

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Inflation eats away at your money. February’s CPI inflation report shows the price of goods and services rose 7.9% from the same period last year, the highest rate of inflation since January 1982.

US households are feeling the pressure of rising prices on their finances. The majority of respondents in a recent Forbes Advisor-Ipsos Consumer Confidence Biweekly Tracker report are very concerned or somewhat concerned about rising gas prices, inflation and rising grocery bills.

With Russia’s invasion of Ukraine worsening Covid-19 supply chain disruptions, experts warn inflation is here to stay for the foreseeable future, making now a good opportunity for consumers to rethink their overall financial strategy.

How to Reassess Your Finances During Inflation

If you find your money scattered around these days, you are not alone. According to a recent New York Times and Momentive survey, 40% of adults say their families are worse off financially than they were before the pandemic.

If your spending allowance isn’t lasting as long as it used to, or you’re starting to feel nervous about your investment portfolio, follow these five steps to rethink and adjust your financial plan.

1. Know where you stand

Before you start reorganizing your finances, you’ll want to know where you personally stand with inflation; calculating your personal inflation rate can help you do this.

A personal inflation rate is more specific than the national inflation rate commonly quoted in headlines. If you are someone who does not eat a lot of meat, for example, you have managed to avoid buying products whose prices are among the highest to date. If you regularly eat takeout or dine out, you’re paying more for every order than you did a year ago.

To calculate your personal inflation rate, subtract your monthly expenses from a year ago from your current monthly expenses. Then divide that difference by your monthly expenses from a year ago. For example, if your current monthly expenses are $2,500 and they were $2,100 a year ago, your personal inflation rate is 19%.

Your personal inflation rate will help you understand why you feel like your money isn’t stretching as far as it used to and can motivate you to reduce unnecessary expenses or fees in your budget.

Read more: How to calculate your personal inflation rate

2. Be smart with budgeting

Once you understand your expenses and your personal inflation rate, it’s time to get back to budgeting basics.

A budget is what creates a solid foundation in anyone’s financial plan. Even if you don’t track your budget down to the last dollar, knowing how much money is coming in and going out each month will help you identify opportunities to increase your income.

Inflation budgeting requires going through your budget with a fine-toothed comb and looking at each section from a savings perspective. Examine your debt repayment category: are there opportunities to save money on interest payments, either by consolidating credit card debt into a 0% balance transfer or a personal loan with a lower fixed rate?

For example, transferring a credit card balance of $4,500 with a 14% interest rate to a 0% balance transfer card with a 2% balance transfer fee can save you nearly $1,000 in total (assuming you pay off your balance within the 12-month introductory rate period). Most 0% interest balance transfer cards are generally only offered to consumers with very good or excellent credit. This strategy will therefore not apply to everyone.

Read more: Balance Transfer Calculator

If you’re an avid credit card user, you can easily lose control of your budget when using your card for everyday purchases, especially if you don’t pay close attention to cost increases over time. Studies show that it’s easier to overspend with credit cards because it eliminates the physical process of handing over cash, making it difficult for consumers to really understand how much they’re spending.

However, it is possible to maintain your budget while using credit cards. For example, you can create a monthly spending limit and set up notifications that let you know when you’re approaching that limit. You can also store rewards or cash back earnings to redeem for a month when unexpected costs arise, so you don’t have to dip into your emergency fund to cover the tab.

3. Cut unnecessary costs

Inflation is already taking a significant chunk of your income; don’t let miscellaneous fees get in the way too.

Almost all financial products charge fees, from credit cards to bank accounts to prepaid debit cards. Although some are unavoidable, there are some fees you can eliminate from your expenses.

Credit cards, for example, can incur a host of fees, including late fees, returned payment fees, and overlimit fees. Avoid them by paying attention to the fine print in your user agreement, how much you spend on your card, and when your bill is due.

Read more: 9 common credit card fees and how to avoid them

Annual fees on credit cards are another story. In some cases, the high annual fees on rewards cards can essentially “pay itself” if you take advantage of all the benefits of the card, such as spending a lot of time in airport lounges.

But if you’re someone who travels maybe once a year, that high-fee travel rewards card might not be worth paying for, and you should consider canceling it. Keep in mind that closing credit accounts can temporarily affect your credit scores.

But you could still be a victim of charges if you primarily use a debit card linked to your checking account. The average overdraft fee is $25, according to Forbes Advisor’s 2021 Current Account Fee Survey, and some banks charge upwards of $5 a month just to maintain the account. If your checking account is continually charging you high fees, consider switching to an online bank or credit union; both tend to charge less. In 2022, Citi® became the first major U.S. bank to completely eliminate overdraft fees.

Some banks will even charge monthly minimum balance fees on checking accounts, which means that if you don’t keep a minimum amount of money in the account, you will be charged. This can be especially painful if you live paycheck to paycheck. This list of no-fee chequing accounts includes several options with no monthly balance requirements.

Read more: Checking that account fees are still expensive: how to avoid them

4. Stay the course with investments

Now that the Federal Reserve is raising rates in an effort to control inflation, investors are hesitant. You might be tempted to tinker with your investment portfolio during volatility, but you shouldn’t. The general rule of investing still applies: stick to your long-term plan.

You probably want to stay invested in stocks during these uncertain times, especially in your retirement accounts. Although 401(k) loans are an option if you need immediate funds, taking out a loan now means you’ll miss out on compound interest for the future.

These loans also carry risks. If you quit your job, you will need to repay the loan before tax day, or it will be considered an early withdrawal subject to tax and a penalty.

Read more: Is the United States Heading for Another Recession?

5. Track your savings

In times of high inflation, you may wonder if now is the time to cut your savings. But that could leave money on the table.

The Federal Reserve is expected to raise interest rates up to six times this year in an attempt to curb inflation. Savings account rates may not rise immediately, but eventually banks will come under pressure to raise interest rates on savings accounts. Getting into the habit of saving now means you’ll have more money for compound interest once rates go up.

If you’re already contributing to savings goals, now might be a good time to review them. If you’re running out of money to spend each month due to rising prices, can you extend your savings goals for a few more months?

Keep in mind that all financial journeys are a marathon, not a sprint, and this may be your chance to find a new rhythm.

Read more: How the Fed’s interest rate hike will affect savings accounts

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