Inflation And Your Budget: How To Save Money During Inflation

It’s hard to talk about inflation without frustration. This year we’ve seen prices increase and the purchasing power of the dollar decrease, while salaries have stayed the same. Between 1914 and 2022 the United States’ average inflation rate was 3.27%. When compared to the current inflation rate of 8%, you can see why economists are concerned with the recent spike.

To understand what’s happening now and what the future might hold, we’ll take a closer look at how inflation works and some of the ways you can get ahead when the economy has got you down.

What Is Inflation?

Inflation occurs when the prices of goods and services continue to rise over time. During this period of increase, the average worker’s salary will remain the same, making it hard to stretch the household budget further. In a stable economy, slight fluctuations in the cost of goods in the average household may go unnoticed. As the rate of inflation creeps higher, the ripple effects of higher prices and stagnant wages can’t be ignored.

For example, our friend Shria uses one tank of gas per week to commute to work. One year ago, that tank of gas cost $45 per week on average, making their monthly budget $180 to get to and from work. Today that same tank of gas costs an average of $60 per week, forcing them to stretch their budget to $240 per month. To stay on track with their savings goals, Shria has been packing a lunch and shopping smarter.

How Does Inflation Impact Consumers?

The example above is just the tip of the iceberg when we talk about the impact of inflation on the average American. Below we discuss some of the contributing factors that fuel an increase in inflation and how economists plan to combat it.

Supply

We had no idea what to expect in the early days of the COVID-19 pandemic. Shutdowns and stay-at-home orders brought production and the import and export of goods to a complete standstill. While production slowed down, the need for some items increased, forcing prices to skyrocket. The cost of items like toilet paper, poultry and fuel began fluctuating wildly due to inconsistent supply. Industry insiders would call this type of inflation supply-side inflation caused by a slowdown in the supply of goods and services.

As you can imagine, recovering from a global supply shortage will take some time. For example, automakers are still battling a low supply of semiconductor chips required to build high-tech vehicles. The microchip crisis has resulted in low inventory. Because new cars aren’t being built to meet consumer demand, inventory of both new and used cars is incredibly low.

Some speculate the chip shortage could be resolved by the end of this year. Companies, like Intel, that produce components for semiconductor chips are less optimistic, forecasting an end to the shortage sometime in 2024.

Demand

We can’t talk about supply-side inflation without talking about demand. When there is an increase in the demand for goods and services, prices will almost always rise. This is often referred to as demand-side inflation. During the early stages of the pandemic, business closures and stay-at-home orders forced us to remain in our homes. Restaurants, retail stores and entertainment venues were temporarily closed, which resulted in more disposable income and time.

With nowhere to go but online, consumers began investing in home entertainment, exercise equipment, and electronics. As demand for these items increased, so did their prices.

The same can be said about the real estate market. With newfound remote flexibility in the workplace, a lot of people decided to make a move to accommodate a new home office or to be closer to family. The demand for single-family homes forced home prices to increase to the highest value we’ve seen to date in most markets.

Inflation Spiral  

Sometimes referred to as a wage-price spiral, an inflation spiral is when rising wages put pressure on companies to raise prices. This encourages workers to demand a pay increase to keep up with rising costs. An inflation spiral spreads across all sectors of the economy from fuel, groceries, and even a night out on the town.

Let’s think about our friend Shria from the earlier example. Shria hasn’t had a pay increase yet this year, but their rent, gas and utilities have all increased. They’ve been dipping into their savings to make ends meet. But Shria will soon have to make more money or decrease spending even further to live comfortably and start saving again. Once this cycle begins, it’s hard to stop in most households.

How To Save Money During Record Inflation

Knowledge truly is power when it comes to battling record high inflation. Below we’ll discuss some strategies that might help you get ahead in an economy that’s pulling you back.

Look At Your Budget And Spending 

Taking a closer look at your income and expenses is a great place to start when you’re trying to save money. A home budget doesn’t have to be anything fancy, a simple list of all of your income and expenses will do.

It’s important to be honest with yourself and set realistic expectations. If your family loves pizza and movie night, that’s something you should include in your budget. Creating a household budget doesn’t mean you get rid of the things you enjoy, it just helps you prepare for them.

Consider Debt Consolidation

After you’ve created a household budget you might find that you have several credit cards charging interest. If you do, you could consider debt consolidation. By consolidating debt, you could get rid of some of the interest you’re being charged each month. You’ll also decrease the number of payments you’ll need to make each month, eliminating the possibility of late fees.

Focus On Your Emergency Fund

We don’t know how long the economy will be in flux. To combat the unknown, it’s a good idea to start an emergency fund. By saving 3 – 6 months’ worth of expenses, you’ll sleep easy knowing if there is a change in your income or expenses, you’ll have access to cash to help you through a rough patch.

Reduce Spending On Variable Costs 

Once you have an idea of what you’re working with, you can start to spend your money wisely. We often shop around for the best prices when we initially buy things like insurance, cable and subscription services.

If it’s been a while since you’ve compared prices, making a few calls and getting quotes for home and car insurance could save you money instantly. With so many streaming services available, it doesn’t hurt to evaluate your subscriptions and cancel those you’re just not that into anymore.

Increase Your Income

Not everyone has the time or energy for a full-time and part-time job. Thankfully, there are ways to increase your income that don’t require long term commitments or hours away from home. Enter gig work.

Online platforms like Upwork and TaskRabbit allow people to post side jobs they need help with. If you have time to complete tasks like online tutoring, data entry, or pet sitting you can accept the gig and make a little money outside of your full-time job.

If gig-work doesn’t interest you, take a peek in your attic or garage for items that you might be able to sell online. If you’ve outgrown your snowboard, or you’re just not into mountain biking anymore, you may be able to sell your items and get a head start on your emergency fund.

Invest Now For Returns Late 

With the stock market changing daily and increasing inflation, it’s hard to focus on investing when the economy feels unstable. But if you have an established emergency fund and can stomach the risk, you could end up with a great return in the future.

Investing in companies that are likely to grow during periods of high inflation could result in profits for your portfolio. A diverse investment portfolio will include stocks with high growth potential and stable investments like government bonds that keep your risk in check. 

Planning And Focus Lead To Smart Spending

It might feel like you are never going to get ahead, but with some planning and focus you can achieve your savings goals. By taking a realistic look at your everyday spending, you’ll be on your way to spending smarter for your future.

To learn more about personal finance and savings strategies visit the Learning Center to stay ahead of inflation.