In a typical year, inflation is usually around 2%. That means that something that costs $1.00 at the start of the year will go up by 2% and cost $1.02 by the end of the year.
So far this year, inflation rates are over four times higher than that goal. This has been the fastest and most extreme spike in inflation since 1981, and people are struggling to make sense of it. That spike in costs is a big deal, and there’s a good chance that you’re feeling that impact on your wallet.
What Is Inflation?
Inflation goes back to the basic economic principle of supply and demand.
Supply is the amount of product the market wants. Demand is how badly the market wants it. At the most basic level, these two things determine the price of everything.
If the market becomes saturated with goods, prices will go down because there isn’t as much demand to buy them. In the other direction, if the demand for something goes up, but the supply remains the same, prices will rise because people are willing to pay more for what they want to purchase.
Examples of Inflation
One place where you can see supply and demand play out is holiday shopping. Before and after the holiday rush, prices settle to match the balance between supply and demand. However, as the holidays get closer, some hot ticket items start to run out of supply, and people are willing to pay more.
That’s how Tickle Me Elmo went from being a $28 toy to a $1,500 collectible. The price inflated to match the demands of the market. After the spike in inflation, the demand fell, supply increased, and now you can easily buy a new Tickle Me Elmo for $17.
We’re currently experiencing inflation because we have both an increase in demand and a global supply decrease. This same balancing effect of supply and demand happens in every industry. The two most significant international events affecting inflation are COVID-19 and the war in Ukraine.
The COVID-19 pandemic has messed with the balance of supply and demand from the very start. It has been the cause of toilet paper shortages, PPE costing ten times its market value, and the significant decrease in labor in restaurants, travel, and entertainment industries. Nationwide restrictions limited travel, trade, and global supply chains, which directly impact the cost of goods.
The war in Ukraine also affects the global market’s supply and demand. With international sanctions and restrictions put in place, the supply of oil has dropped everywhere, which has caused gas prices to skyrocket.
How Does Inflation Affect You?
Inflation affects you through higher prices. When inflation is contained to under 2%, a few extra cents are spent, and most consumers barely notice the difference.
During times of high inflation like we are currently experiencing, inflation is felt by every consumer. From the gas pump to the grocery store, consumers see higher prices.
The most frustrating part about inflation is that it happens globally. Consumers are often left feeling like there is nothing they can do to fight against the rising prices. Luckily, you can prepare for inflation at home.
How Can I Prepare for Inflation at Home?
Here are eight ways how you can prepare for inflation at home.
1. Be Patient
There are two types of inflation; short-term and long-term. We’re not 100% sure what kind of inflation we’re currently experiencing, and time may be the best solution to let the current inflation rate resolve itself.
Short-term inflation is triggered by supply and demand issues. Once the issues are resolved, inflated prices will drop back down.
Due to global supply chain issues, the pandemic, and international war, severe hits have been hitting the supply and demand balance. Because we don’t know how long these conflicts and global issues will affect the market, you may only have to wait another month for them to settle and inflation rates to drop.
2. Take Control of Your Finances
One of the best ways to prepare for inflation is to understand the exact details of your finances. Establish a budget that establishes where and how money is going out of and coming into your bank account.
Everyone can make a budget. It doesn’t matter how you choose to take control of your finances; it only matters that you take the time to thoroughly understand how you are spending and saving money to make better choices with what you have available. There are a variety of budgeting methods, and there are even tricks for young families to make budgeting easier.
3. Ask for a Raise
If you want to afford the same purchases and do the same things with your money as before inflation, the only solution is to earn more money. Speak to your boss or manager and ask them for a raise. In most industries, it’s expected for the company to have annual raises that at least keep up with the inflation rate.
If you receive an 8% raise, it may look like your bank account is doing better than before, but you only have the same purchasing power as what you did before inflation hit. For the first few months after getting a raise, avoid making impulse purchases and try to acclimate yourself to the newly inflated prices, so you don’t mismanage your money.
4. Prioritize Your Debt
While inflation does not directly change how much debt you owe, it can impact the available budget you need to pay off your debt. By eliminating debt, you free up money that can be spent elsewhere.
5. Reconsider Large Expenses
High inflation rates put the market prices in flux, and the biggest impact can be seen in large projects and purchases like home renovations or a new car.
It can be tempting to rush to buy something because you think if you don’t buy it now, you’re only going to have to spend more later. True, some major purchases may cost more a few months from now, but that doesn’t mean you can afford them now, either.
Just because the price of a Tesla goes up does not mean that you are saving money by buying it now. It’s still a significant expense, and you still don’t have the financial stability to make that purchase. For example, if you had limited savings and were barely making it some months before the spike in inflation, there’s a good chance you were never in the market for buying a new Tesla.
6. Diversify Investments
Many people think you have to have thousands of dollars saved before you can start to think about long-term investing. This is not true.
If your budget makes it possible to set aside an extra $20 a month, you can invest. Investment apps and programs are changing how people invest and allowing anyone and everyone the opportunity to build their investment portfolio.
A balanced investment portfolio is a great way to prepare for the impact of inflation. The average growth of the stock market traditionally mirrors the same rate of inflation, which helps protect your investment and allows you to keep the same purchasing power even during periods of high inflation.
7. Invest in Yourself
Investing in your talent and strengthening your resume helps you maintain or improve your purchasing power over time. Increasing your value to your employer or a potential future employer will help you negotiate for more earnings over time.
8. Negotiate Lower Prices
Not all prices are set in stone. Negotiating with some companies to lower prices or receive small (and sometimes large) discounts is possible. While it might not seem like much, even small discounts and reductions can add up and lead to significant results.
Remember to be friendly and kind when asking if there are any programs or discounts that you qualify for with the company. If you are rude, pushy, or demanding, there is a lower chance that you’ll get any help.
Negotiating with companies is a proven and successful way to save money if you come prepared. Research shows that anywhere from 62% to 83% of people who try to negotiate for a lower price are able to get it.
If you’re nervous about negotiations, do your research and come prepared. Doing your homework to know what you’re looking for, what the competitors are offering, and what you’re willing to settle for can help you find meaningful savings.
How Can I Protect My Money from Inflation?
When inflation hits, you keep cash in your wallet. It’s not growing, which means your bank account is taking the biggest hit in your purchasing power. Find a bank or investment somewhere to put your money in.
While it’s better than being in a wallet, the next worst place you can put your money to protect it against inflation is in a savings account or investment bond. These two options provide limited and restricted interest rates. The ideal goal is for your money to have the same growth rate as inflation.
The best place to put your money is in a diversified portfolio of stocks and mutual funds. On average, a diversified portfolio will grow at about 10%. That means that even during periods of high inflation (right now), your portfolio will still be gaining a growth of about 2% in purchasing power.
Power Finance Texas Can Help
We aim to help everyone gain basic money management skills so that you can be ready for whatever life has to throw at you. It’s easy to be prepared for inflation when nothing is going wrong, but what can you do when life happens at the same time?
Power Finance Texas can help you get back on your feet when you need a short-term loan. Apply for your loan today.