With the price of food, housing materials, cars, gas and other necessities increasing daily, the most popular word in the financial lexicon is inflation. What is inflation and how should you respond to it in this moment? Let’s keep it simple. Inflation is the reduction of the purchasing power of your money. Really what I’m saying is that your money or dollar does not go as far as it used to. That said, here are some financial realities you must consider as inflation rises.
Inflating Your Budget
The budget you made in January and February is no longer relevant. By now you should have realized, with your income remaining the same each month along with the increase in goods, that your old budget amounts are no longer effective. Now, you must consider the projected rate of inflation for the remainder of this year and increase your old budget by that rate. For example, if the projected inflation rate is two percent you may have to increase your budget amounts by two percent because of inflation.
With inflation on the raise you also may have to change some of your shopping habits and focus on necessities. Inflation does not mean that you now look to your emergency fund for assistance. It simply means that you make some adjustments. Inflation does not mean that you now rely on credit cards to get through increased cost. You may have to change brands or not use brand name products in adjusting to inflated prices.
Should I or Should I Not?
Inflation does raise the question of, should I purchase it now or later? If your purchasing power is decreasing, then should you consider purchasing groceries in bulk and stocking up before they become more expensive? What if you are considering purchasing a vehicle, should you purchase it now since costs are rising? The truth is, if you wait the amount of your loan will be more which means it could take you longer to repay in full and the lender will be earning more interest on the loan from you. What about that summer trip? Inflation should cause you to reevaluate some destinations since the cost of car rentals and airline tickets has escalated.
Simply put, inflation should cause you to stop and pause so that you can consider your financial present and your future. Any small or large purchases should be thought and prayed over, especially when costs are on the rise.
The rate of inflation should also give you pause when it comes to your retirement savings. The amount in your retirement today has less value given the rate increase. So what should you do? Perhaps you should plan to increase your contribution by some percentage of the rate of inflation to keep pace with a quality retirement lifestyle. Or, as my grandma would say, so that you are not living “hand to mouth.” Some of you will catch that next week. The point is, make sure you give due consideration to your retirement portfolio as the rate of inflation increases.
Here are some final thoughts to consider as I close out this Money Monday. If you are planning to ask for a salary increase, factor the inflation rate into your next ask. Let’s be honest! Most people seeking new employment don’t think about inflation. But a five or ten thousand dollar increase in your salary could make a world of difference. Especially as the rate of inflation increases in this new economy. This week, go ahead and make a smart money move!