Inflation – the rise in consumer prices – is a slow erosion of your money over time. Prior to 2021, several economies around the world did not experience annual core inflation well above the current level for almost 25 years.
So the surge seen globally over the past year in the costs of fuel, used vehicles, groceries and just about everything else is the kind of sudden, systemic increase which can give a shock to most people’s daily expenses.
With inflation eating away at your purchasing power, how can you protect yourself? Here are four steps recommended by financial planners that are practical for everyone.
Step 1: Review your expenses
• Cut discretionary spending, voluntary spending in categories like entertainment (the leisure activities you participate in, whether it’s movies, art, expensive hobbies, etc.) or travel, by just 5%. It’s one of those gradual changes that isn’t that hard to make and goes straight to your personal bottom line.
• Don’t delay a major purchase because prices are likely to rise.
• Buy strategically. Buy more generic branded products and prescriptions. Save on necessary expenses by using coupons and in-store loyalty programs. Use rewards cards to pay less for fuel – although the savings may seem too small at first, keep in mind that it adds up.
Step 2: Look for savings
• Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). These days, many banks, especially digital banks, are waiving these fees, and credit cards often offer no-fee options.
• Renegotiate your cable, streaming or cellular TV plans for possible savings.
“I can say from my own personal experience – it’s amazing how easy it is,” said Michael Ashton, who works for a US-based investment and advisory firm.
He said that every time he calls his mobile carrier, they will offer him a much better plan than he currently has. “And that only happens if you call,” Ashton explained.
He’s now making a habit of calling once a year and asking, “What’s the best plan you have and should I be on that?” – a step he also recommends to his international clients.
• Reduce the number of subscriptions you have, even if by only one. This may include subscriptions to periodic digital products or media streaming services.
“You should check on these from time to time, because sometimes they sneak in a price increase, and it just shows up on your credit card,” Ashton added.
Step 3: Look for ways to bring in more money
Look for financial institutions that pay higher interest rates than what you currently earn (if you earn anything). Online banks often offer high-yield savings accounts that sweeten returns, especially as interest rates are rising around the world.
Is there a possibility of a salary increase this year in your company? If you haven’t received a raise in a few years, you’ve likely taken what amounts to a pay cut due to inflation, Ashton added.
Step 4: Invest money in inflation-fighting savings bonds
Another idea to fight against inflation: savings bonds. They are available in every country in the world specifically to protect consumers’ purchasing power against inflation, said Zvi Bodie, a senior finance professor. Bodie holds a doctorate in economics from the Massachusetts Institute of Technology (MIT) and has become a strong supporter of I Bonds.
Savings bond rates are pegged to the rate of inflation, which recently topped the peak, he noted. They are a perfect haven for short-term savings. And it’s not a bad addition to your long-term nest egg, either.
A minimum investment in such bonds is minimal, and an individual can only pour thousands of dollars each year into savings bonds with electronic purchases. Bonds pay fixed interest plus the rate of inflation, adjusted twice a year.
In most cases, you can withdraw your savings without penalty after one year, but if you cash it out before five years, you will lose interest for the last three months. However, you should check this with your regional bank.
“So what you get is basically a savings account that can’t go down, and will go up with inflation,” Bodie added. “Do I need to say more?”
Verdict: Inflation is never the same for everyone
Although inflation hit a ten-year high in January in most countries, that’s unlikely to be your rate of inflation, Ashton said.
You may consume different items than the average person and you may not live in an average place, so your particular inflation rate most likely varies from the average, according to Ashton.
So, rather than agonizing over a single number like losing purchasing power to recover, use the small money moves above to improve your financial situation slowly but surely.