It is more important than ever to manage your expenses well.
- In a high inflation environment, things cost more and your money is worth less.
- Keeping most of your money in cash means you lose money.
- Pay off high-interest debt and cut spending to make your money grow.
The average American is now paying almost $4,100 more for basic necessities and gasoline this year. In April, the price of consumer goods rose 8.3% year over year, according to the most recent data from the Labor Department. From gas prices to food prices, the dollar isn’t going as far as it used to. Here are three financial mistakes to avoid in times of high inflation.
1. Don’t keep your money in cash
The average national savings rate is currently 0.07%. With inflation at 8.3%, the real value of your money actually declines by 8.23% every 12 months. Not only do bank accounts earn very little interest, but keeping most of your money in cash means you’re losing money. You should keep three to six months of your expenses in your emergency savings account, but anything over that amount could result in unnecessary loss of money through inflation.
Investing in stocks is one of the best ways to keep up with inflation. Stocks can be volatile, but over the long term, the S&P 500 has outperformed inflation. The stock market is down nearly 15% since the start of the year due to economic conditions and the Fed’s hike in interest rates. But averaging and consistent investment can help you achieve your financial goals.
The stock market’s 10 best days in the last 20 years came after big declines such as the 2008 financial crisis and the outbreak of Covid. If you had invested $10,000 in the S&P 500 on January 1, 2002, you would have $61,685 by December 31, 2021. If you missed the 10 best days during this period, you would have $28,260, or more than 50% less. By comparison, $10,000 sitting in a savings account averaging 0.15% per year would only amount to $10,152. The key is to build your investment portfolio based on your risk profile and your investment goals.
2. Not Repaying Variable Debt
To calm inflation, the Fed raises interest rates to slow demand. You should focus on paying off variable debts such as credit cards, lines of credit, and other debts that are directly affected by higher interest rates. The average credit card interest rate is currently 16.59%, 44 basis points higher than the same time last year. The interest rate for those with subprime credit ranges from 22% and above.
The difference between a 15% APR and a 20% APR can be thousands of dollars in interest. Focus on paying off your high-interest debt during times of high inflation. If you have a lot of debt, you might consider moving your high-interest debt to a lower APR, getting a debt consolidation loan, or asking your credit card issuer to lower your interest rates. . Keep checking your variable rates for the latest changes.
When prices go up, your money won’t go as far. Keep a budget to reduce your expenses. Some categories have increased more than others, so you may need to update your budget by category. Gasoline prices are more than 50% higher than 12 months ago, food 9.4%, used vehicles 22.7% and clothing 5.4%.
When necessities start to cost more, you should look at your expenses to reduce your costs. Cancel unwanted subscriptions, eat out less often and look for ways to save gas. Reducing your expenses can help offset higher costs. Until prices return to normal, your money is worth less. Saving more can help you better prepare if high inflation continues to be a problem.
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