If you're worried about inflation and how your family might be affected, it can seem like you're helpless. You do have some control over how inflation affects your family finances. Read on for more on how inflation works and concrete tactics you can use to lessen the impact of inflation on your household.
What is inflation?
What does inflation even mean? It’s a term mentioned often, but many of us were never taught in school. Inflation is the rise in prices over time. Think about when your parents told you about what a Coke or snack cost when they were growing up compared to the current price. This is an example of inflation. You’ll probably do this with your own kids too. Understanding this concept is an important part of personal finance.
“a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services” Inflation as defined by Merriam-Webster
It's important to remember that inflation is a general rise in prices. Not everything goes up in price. In fact, some things are less expensive now than they used to be. The overall trend, however, is for prices to go up over time. Another important nuance is the rate at which this happens. There are periods of time throughout American history where inflation is higher or lower than average.
Is inflation bad for your family?
Yes and no. A moderate level of inflation is a good thing. A growing economy for our country means that prices do rise over time. A growing economy is good for us as Americans and that certainly includes your household. Higher inflation, however, can be a negative for your family. It can mean the necessities you need for your family cost more than they used to at the store.
Can you do anything about inflation? Yes, there’s concrete steps you can take that will help your family weather the effects of inflation.
What Uncle Sam thinks vs. what you experience
It’s worth noting that sometimes people can’t agree on if inflation is higher or lower than in the past. That includes economists, government officials, financial analysts, and many others. How can that be? I’ll give you an example. The federal government’s most cited measure of inflation is called the Consumer Price Index (CPI). This number measures the level of inflation based on a rise in prices consumers experience. The problem is CPI excludes some important parts of the average American family’s budget. Food and energy are not considered in this calculation. In other words, groceries and gas could go up and Uncle Sam would say there’s no inflation. Be skeptical, in a healthy way, when you see inflation discussed in the news.
Ways to Counteract the Effects of Inflation on Your Family
Make and Monitor Your Budget
This may seem basic, but take this step seriously. In a world where so many of us use a card or autopay for bills a price increase can go unnoticed. Our habits also tend to avert our eyes and attention away from increases in prices. Don’t dwell, but do pay attention to changes that happen month to month in the costs your family experiences. It may make sense to prioritize in some aspects of your family spending and cut back in others.
Avoid the “Mattress” for your Cash
When inflation happens, especially high inflation, your dollars are less valuable today than yesterday. To combat this, make sure your cash is earning some level of interest. One example this is keeping too much money in a checking account that earns no interest. Consider shifting some money you don’t need for near-term bills to something like a money market or high yield savings account that will earn a modest level of interest. The interest will likely not beat inflation for this type of account but will offset some of the effect of inflation while keeping money secure.
It’s not guaranteed but inflation and higher interest rates almost always go hand in hand. Take time to review debt in your family. Categorize everything into either variable rate or fixed rate. Any debt with a variable rate has the potential to increase your payments in a period of higher rates. Make a plan for how to protect against this possibility. For example, if you have a mortgage with a variable rate you could consider refinancing to a fixed rate. There’s other factors to consider, but there could be benefits to locking in a rate. It might also be prudent to look at other debts with a variable interest rate and think about paying down more of the balance each month.
Invest to Outpace Inflation
One of the most effective long-term tactics to beat inflation is by investing. Diversified investing over a long period of time is likely to beat inflation. This means exposure to broad based investments like stocks and bonds that have the potential to exceed the scourge of inflation. This includes your 401k and other retirement money, college savings, and other investment assets. If you have any accounts this in assets intended for more short-term purposes like cash or a money market this could be a good time to make adjustments for a longer term plan.
Monitor Your Salary
In a period of higher inflation, it’s important to pay attention to your salary and other compensation at work. Why? If your salary stays the same and the cost of everything goes up, you’re effectively making less money. Have a command of these factors in settings like an annual review at work where compensation is a topic. It is perfectly reasonable to remind your boss that a 2% raise in a year with 3% inflation is not a real raise.
“A false balance is an abomination to the Lord, but a just weight is his delight.” Proverbs 11:1 ESV
A Word About Gimmicks
Unfortunately, there are many pitchmen on radio, internet, and elsewhere who want to sell you products motivated by inflation concerns. Be wary of solutions that mix talk about inflation with fear. If you do entertain one of these options advertised in the media, tread carefully and skeptically. More often than not these products and more in the interests of the seller than your family. Always read the fine print before committing money and resources.
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