5 ways to rethink your finances for inflation – Forbes Advisor

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Inflation is eating away at your money. The February CPI inflation report shows that the price of goods and services has risen 7.9% from the same period last year, the highest rate of inflation since January 1982.

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

With the Russian invasion of Ukraine compounding ongoing Covid-19 supply chain disruptions, experts warn that inflation is here to stay for the foreseeable future, making now a good opportunity for consumers to reconsider their strategy. overall financial.

How to reevaluate your finances during inflation

If you find your money is tight these days, you’re not alone. Forty percent of adults say their families are worse off financially now than they were before the pandemic, according to a recent poll by the New York Times and Momentive.

If your spending allowance doesn’t last as long as it used to, or if 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 are

Before you start overhauling your finances, you’ll want to know where you stand on 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’re someone who doesn’t eat a lot of meat, for example, you’ve managed to avoid buying products with some of the highest price increases to date. If you regularly eat takeout or dine in restaurants, you’re paying more for each 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 expense is $2,500 and a year ago it was $2,100, your personal inflation rate is 19%.

Your personal inflation rate will help put into context why your money doesn’t seem to be stretching as much as it used to, and may motivate you to eliminate any unnecessary expenses or fees in your budget.

Read more: How to calculate your personal inflation rate

2. Be budget smart

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 follow your budget down to the last dollar, knowing what money comes in and out each month will help you identify opportunities to further stretch your income.

Budgeting for inflation requires going through your budget with a fine-tooth comb and looking at each section from a savings perspective. Look at your debt payment category: Are there opportunities to save money on interest payments, either by consolidating credit card debt into a 0% balance transfer or a lower fixed-rate personal loan? low?

For example, transferring a $4,500 credit card balance 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 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, so this strategy won’t apply to everyone.

Read More: Balance Transfer Calculator

If you’re an avid credit card user, you can easily lose control of your budget as you swipe your card for everyday purchases, especially if you don’t pay close attention to rising costs 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 harder for consumers to really understand how much they’re spending.

However, it is possible to stick to your budget while using credit cards. For example, you can create a monthly spending limit and set notifications to update you when you’re close to that limit. You can also accumulate 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 fees

Inflation is already taking a part of your income; don’t let miscellaneous fees get to you too.

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

Credit cards, for example, can have a number of fees, including late payment fees, returned payment fees, and over-limit fees. Avoid them by paying attention to the fine print in your user agreement, how much you’re spending on your card, and when your bill is due.

Read More: 9 Common Credit Card Fees and How to Avoid Them

Annual credit card fees are another story. In some cases, expensive rewards card annual fees can essentially “pay for themselves” if you take advantage of all the card benefits, like spending a significant amount of time in airport lounges.

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

But you could still be charged if you primarily use a debit card linked to your checking account. The average overdraft fee is $25, according to the 2021 Forbes Advisor Checking Account Fee Survey, with some banks charging more than $5 a month just to maintain the account. If your checking account continually charges you high fees, consider switching to an online bank or credit union; both tend to charge less fees. In 2022, Citibank became the first major US bank to completely eliminate overdraft fees.

Some banks 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 particularly painful if you live paycheck to paycheck. This list of free checking accounts includes multiple options with no monthly balance requirements.

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

4. Stay on track with investments

Now that the Federal Reserve is raising rates in an effort to control inflation, investors are reeling. You may be tempted to gamble with your investment portfolio during volatility, but you shouldn’t. The general investment rule still applies: stick to your plan for the long haul.

You may want to continue to invest in stocks during these uncertain times, especially in your retirement accounts. While 401(k) loans are an option if you need immediate funds, taking out a loan now means you’ll miss out on compounding for the future.

These loans also come with risks. If you quit your job, you will be required to repay the loan before Tax Day, or it will be considered an early withdrawal subject to taxes and penalties.

Read More: Is the US Heading for Another Recession?

5. Keep up with your savings

Times of high inflation may have you wondering if now is the time to cut back on your savings. But doing so could leave money on the table.

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

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

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

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

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