Wondering what exactly inflation is, or why it happens?
Inflation means that prices are going up which decreases the buying power of your dollar. Simply put, if avocados suddenly cost $5 instead of $3, your original $3 is going to buy you significantly less avocado. It is usually caused by two things: an increase in cost to produce goods and services, or demand being significantly higher than supply. Also called "the worst tax," inflation is silent but deadly for your savings.
Keeping your money in a bank may seem like a safer bet because you earn interest, but the interest rates mayn’t be high enough to counterbalance the effects of inflation. Another safety fallacy is that if you are consistent in putting money away, your savings will be protected. This is not always true, because if your money is worth less, you’ll have to increase the amount of money you’re putting away in order to stay on track for savings goals.
What’s the worst thing you can do for your savings when faced with inflation?
Keep it in cash or any kind of checking account. Keeping money under your bed or easily accessible may *feel* safer, but the only safe guarantee for cash is that it will be worth less in the future. While putting your funds into a high-yield savings account, CD or money market account may be a safer bet, the average interest rate of such accounts is around three percent. When you factor in inflation, you'll be down about four percent. This is less volatile than the stock market, but still brings a certain degree of risk.
Why is inflation such a buzz word all of the sudden?
Historically, the long-term annual average rate of inflation in the United States was between 2-4 percent. Today, at the beginning of 2022, inflation is approaching 7 percent. Such a high rate has not been observed in over 40 years. For an easy way to calculate just how much inflation can erode your money, check out NerdWallet’s Inflation Calculator.
Smart money move: refinance your home
Take advantage of the facts that mortgage rates remain low. Refinancing your home’s mortgage could save you hundreds of dollars per month on mortgage payments. That money would definitely be better spent somewhere else (like on groceries or gas). Alternatively, if you’ve been looking to buy property, now is the time. Inflation favors buyers over renters, as landlords may hike up rent prices to reflect rising prices.
Buy less meat. Meat prices have skyrocketed during the pandemic, according to recent consumer prices indexes by the U.S. Bureau of Labor Statistics. Beef prices have increased 20.9 percent during the last year and chicken increased 9.2 percent. Turkey and other uncooked poultry prices have only increased by about 4.6 percent, so consider cooking with more poultry and vegetables to lower the cost of your grocery bill. Check out other grocery items on the consumer price index that haven't increased in price so much and challenge yourself to some new recipes with new (and cheaper) ingredients.
What are my other options?
Keep this in mind...
Nobody is totally immune to inflation. The best tool in your arsenal is having a budget and sticking to it. Be mindful of your spending habits and where you may be overspending. Remember that inflation won't last forever, you got this!