For most people, “inflation” is a scary word. It means the money you earn today won’t be worth as much tomorrow, and that you’ll have to pay more for the same products and services down the line.
In the United States, policymakers try to keep inflation right around 2% per year, keeping pace with the growth of the economy. What costs a dollar to buy this year will (generally speaking) cost $1.02 next year, and a person who was paid $12 an hour this year might earn $12.25 an hour next year.
Problems start to arise when inflation overshoots that benchmark – as it has this summer!
By July 2021, consumer prices were up 5.4%. While most economists agree that this unusually high growth is likely a “temporary shock” caused by the sharp ups and downs of the pandemic, it’s not clear how long it will last, or what the best strategy is for fixing it.
While we wait to see what happens next, you still have options to protect your finances from inflation:
- Add a buffer to your budget. To avoid unexpected shortfalls at the end of the month, it can help to give yourself a small (3-5%) buffer. For example, if you usually spend $500 on groceries in a month, set aside $515 to $525 instead. If you run five or ten dollars over your usual spending, don’t worry – you’ll still be under budget.
- Be a thrifty traveler. If you’re like most people, you’re probably itching to get out of town and go somewhere new. While airline ticket prices dropped in August, the cost to fly is still up nearly 32% compared to last year. That has many vacationers looking to continue mapping out their own road trips – which can also lead to some sticker shock at the pump. Gasoline is also up about 50% from last year.Look for creative ways to save: Staying with family or friends, vacationing closer to home or using public transportation can all help cut costs.
- Shop for deals. After a year of spending more time at home, consumers are ready for a wardrobe update … but their budgets may not be. Apparel prices are up 4% from last year, meaning it probably isn’t a good time to buy new clothes off the rack.The best option is to hold off on buying clothing until prices settle. If that’s not possible, watch for sales or shop at factory outlets, thrift stores or online consignment sites instead.
- Invest the rest. This is nothing new: Investing has always been a sensible way to fight against inflation. A low-risk, diversified portfolio can grow your money over time, when otherwise it would be slowly losing value in a zero-interest checking account.
While there continues to remain several unknown variables lately, it’s important to remember that inflation will most likely ease with time. Until it does, the good habits for financial health haven’t changed: Shop smart, save carefully, and be ready to adjust your budget to the circumstances.
Dan Karas is executive vice president of Allied Affiliated Funding, a division of Axiom Bank, offering asset-based lending and invoice factoring.
