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Inflation—or an extended period of rising prices—can take a real bite out of your budget. This year has seen inflation rising rapidly, with the government’s consumer price index showing food prices soared 10.9% over the year that ended in July. That was the biggest 12-month increase since 1979.
Higher prices mean you may need to be more strategic about spending to stretch your income. Learning how to budget for periods of higher inflation can help you rethink the way you spend—and potentially find money to save.
How to Protect Yourself From Inflation
Periods of rising prices can be unpredictable, and there’s no way to accurately gauge how high inflation might climb or how long it will last.
You can take some steps to protect yourself from inflation’s worst impacts. You can start by looking at your short- and long-term financial plans to see what adjustments you might need to make.
Higher inflation could mean deferring a home improvement project or spending your vacation at home instead of traveling. Or it might require something more extreme, like taking on a second job or starting a side business.
Balancing saving with debt repayment can be another way to protect yourself against inflation. When prices rise, money in a savings account may not go as far, especially if you’re earning a lower rate on deposits. Likewise, you may choose to pause taking on any new debt temporarily.
Having a budget to follow can make your inflation-proofing plan work. As you work on making a budget for inflation, here are eight important things to consider.
1. Streamline Your Mortgage Costs
If you own your home, your mortgage may be one of your biggest budgeting costs. You may have an opportunity to reap savings by refinancing.
So how do you determine if refinancing makes sense? First, consider what rates you’re likely to qualify for based on your credit score and income. Then, compare that to your current interest rate. A mortgage refinance calculator can help you run the numbers.
Next, think about how long you plan to remain in the home and how much you may have to pay in closing costs for a mortgage refinance loan. If you plan to stay in the home at least long enough to reach the break-even point—meaning you recoup what you pay for closing costs in interest savings—that could make refinancing worthwhile.
If you’re not in a position to refinance your mortgage, here’s another possibility for saving: Shop around for a better deal on homeowners insurance. Finding a less expensive policy could help shrink your budget and save money.
2. Reduce Rates on Other Debts
Aside from a mortgage, you may be budgeting for debt repayment toward credit cards, student loans or other lines of credit. Paying off debt, or at least making it less expensive, can help when higher prices kick in.
If you have credit card debt, look for 0% APR balance transfer offers or low interest personal loans from your bank. A 0% balance transfer can give you time to pay back what you owe interest-free. Personal loans, meanwhile, can help you consolidate high-interest debts at a lower fixed rate.
Refinancing student loans could help you secure a lower rate, making monthly payments more manageable. But keep in mind that refinancing federal loans into private loans means sacrificing certain benefits and protections.
3. Complete an Energy Audit
Energy prices are a major driver of inflation. When different energy sources—including coal, natural gas, heating oil and electricity—cost more, the cost of producing and transporting consumer goods also goes up. The companies that produce or move those goods pass the higher prices on to consumers.
Budgeting for higher prices means considering how much energy you’re using at home and finding ways to curb costs as much as possible. According to the U.S. Department of Energy, some simple ways to reduce energy usage at home or on the road include:
- Sealing air leaks around windows and doors
- Having your HVAC system cleaned and serviced in spring and fall
- Using energy-efficient lightbulbs
- Setting your thermostat lower in winter and higher in summer
- Unplugging electronics when not in use
- Keeping your tires properly inflated
- Carpooling to share fuel costs
- Consolidating trips in the car and driving the speed limit
These are just some of the things you can do to reduce your energy expenses and put money back in your budget.
If you’re struggling with higher energy prices, you may consider looking into the Low Income Home Energy Assistance Program. This program provides eligible households with financial help in paying heating and cooling bills.
4. Save on Car Insurance
As mentioned, changing homeowners insurance is one way to save money when budgeting for inflation and higher prices. But you may also want to rethink your other insurance coverage.
Some ways to save money on car insurance, for example, include:
- Raising your deductible, which could lower your monthly premium
- Negotiating a safe driving discount
- Reducing coverage, if appropriate
- Comparing quotes and changing auto insurance companies for a better price
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5. Eliminate Unnecessary Subscriptions and Fees
It’s possible that you may be throwing money away on subscription or streaming services each month. According to J.D. Power, the average household has 4.5 streaming services and spends an average of $55 on them per month.
This may not seem like much, but $55 a month adds up to more than $600 per year. If you’re trying to cut expenses in the face of higher prices, then ditching unused subscriptions can be a good place to start.
Some personal finance apps can make this easier if you don’t have time to track down all of your subscriptions. Mint and Truebill, for instance, link to your bank account and credit card accounts, look for subscriptions you’re paying for and may help you cancel them if you decide you no longer need or want them. Some apps can even help you negotiate better deals on cable, internet and cell phone services for added savings or to reduce what you pay for bank fees.
Speaking of banking fees, switching banks is something else you might consider. On average, checking account fees may be costing you $32 per month or nearly $400 per year. So, changing banks or finding a new checking account could be a good way to add money back to your budget when trying to offset inflation.
6. Shop Smarter at the Grocery Store
Feeding your family isn’t something you can skip out on, so it’s important to find ways to budget wisely for groceries when prices are rising.
Here are some money-saving tips to help you manage your grocery budget:
- Swap out brand-name items for generic products as much as possible.
- Buy in bulk if it allows you to purchase items at a lower unit price.
- Incorporate more meatless meals into your family’s diet.
- Use grocery store weekly sales flyers to plan budget-friendly meals.
- Shop local farmers’ markets if that’s an option where you live.
- Incorporate more low-cost staple items into your meals, such as pasta or rice.
You can also use money-saving apps to reduce your grocery spending. With Ibotta, for example, you can earn cash back on grocery purchases at partner stores. This can be a simple way to combat inflation and higher prices at the supermarket.
7. Make Room in Your Budget for Investing
For some people, periods of rising prices might seem like the wrong time to invest. Why would you put money into the stock market when you’re facing higher monthly costs?
Here’s a better way to think about it: Whether you’re investing for retirement or other goals, you need to sustain regular contributions no matter what’s going on in your financial life. After all, one of the reasons to invest in the first place is to beat inflation by maintaining and growing the purchasing power of your savings over the long term.
That said, if your budget is under pressure, consider reducing your contributions in the short term. Just make sure you restore and possibly grow contributions once the pressure’s off.
There are investments that are specifically designed to help you beat inflation. Take Series I savings bonds, a nearly risk-free investment that pays an annual interest rate of 9.6% through at least October 2022. When inflation rises, I bonds are designed to pay you more.
You may be able to supplement your income if you’re investing in dividend-paying stocks. A dividend represents a share of a company’s profits. Some public companies actually benefit from inflation, since they’re able to raise prices and realize larger profits, which could be passed on to you in the form of dividends.
8. Increase Your Income if Possible
One of the biggest problems with inflation and higher prices is that incomes don’t rise accordingly. While the Great Resignation of 2021 prompted some employers to increase wages for workers, pay rates in the U.S. have remained largely stagnant for decades.
Finding ways to increase your income can make periods of extended inflation easier to get through and budget for. Some of the possibilities for increasing income might include:
- Selling things you don’t need
- Negotiating a pay raise with your current employer
- Changing jobs for better pay
- Taking on a part-time or second job
- Starting a side hustle or side business
Each option has its pros and cons, as well as its risks and rewards. But growing your income may be one of the best ways to protect yourself and your budget against the impacts of inflation over time.
Inflation can make household budgeting more of a challenge, and it can be frustrating when there’s seemingly no end in sight to rising prices. Knowing how to prepare for inflation starts with analyzing your fixed expenses and discretionary spending to see what you might be able to cut.
From there, look for additional ways to save, such as refinancing debt at a lower rate, reducing your home energy costs and changing insurance providers. Finding ways to grow your income can also help to make up for any budgeting shortfalls that result from higher prices.
Frequently Asked Questions (FAQs)
How do I hedge against inflation?
From an investment perspective, hedging against inflation means finding investments that are less likely to be negatively affected by rising prices. Investing in commodities can make sense, as people still need to purchase basic food and household items even when prices are rising. You can also choose investments that inherently counter the effects of inflation. For example, Treasury Inflation Protected Securities are designed to produce returns that keep pace with inflation.
Is real estate a hedge against inflation?
Real estate is often considered a hedge against inflation. Rental property investors can increase rents when inflation rises to make up for any cost differences they might encounter by owning and maintaining properties. Similar to basic goods, inflation typically doesn’t affect the demand for housing.
How can I save on groceries during inflation?
Grocery costs can rise significantly during periods of higher inflation, and there are several things you can do to manage increasing costs. Buying low-cost staple items, making meals at home, using coupons, signing up for store loyalty cards, meal prepping and using cash-back apps can all help you save on groceries when inflation rises.
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