Inflation. You’ve heard the word. And even if you don’t know exactly how it works, you don’t have to be an economist to know that inflation doesn’t feel like a good thing for you — the consumer. But in reality, most economists consider inflation to be the sign of a healthy economy.
So just what is inflation? Simply put, it means that prices are rising. Which means that your dollar doesn’t stretch as far. Americans have come to expect a certain amount of inflation without giving it a second thought, but according to the Federal Reserve, a 2 percent annual inflation rate is ideal. You might chuckle now at the salary you made at your first job. And back in the late 70’s when you were getting paid the grand salary of $10,000 a year, a brand new Chevy Impala would have only set you back $5,400. Today’s Impala would cost you between $27,000 and $40,800. Hopefully, you’re making enough – or saved enough – to afford that higher price tag.
Funny how it creeps up on you like that, but that’s the way of inflation. You may start to notice the pinch when more of your salary seems to be going toward necessities — such as groceries, gas, rent and mortgage payments. And of course, those with less money to spend, feel that pinch the most.
So what can you do about it? For now – and for Future You? Well, frankly there’s very little you can do to stop inflation. So the trick lies in managing your finances so your grocery money – and your nest egg – will keep up.
How to manage the now(whether you like it or not)
- Adjust your buying habits.
- For groceries, try substituting store brands or generics for name brands. Cut coupons – and remember to use them.
- There may not be a generic version of your favorite car, but consider a lower-priced model. Think Toyota instead of a Lexus.
- Cut back on restaurant meals. It’s not as much fun, but cooking at home does save money, plain and simple. And so does taking your lunch to work.
- Drive a car with better gas mileage. Invest in a hybrid or choose a smaller car rather than that large SUV. Thank about carpooling or taking the bus.
- The kids are gone. Do you really need to pay the hefty mortgage and upkeep on a 5-bedroom, 5-bath McMansion?
- Allocate a part of each check to your savings account — first. Preferably one that’s going to earn you some interest.
And manage your future
- If you’re still working…
- Contribute to your retirement fund. It will help you establish a nest egg and employers will often match employee contributions.
- Ask for a raise. It may be easier said than done, but it can’t hurt. The goal is to make your income increase at a rate equal to or greater than inflation. But a word for the wise – it may be about the money for you, but be sure you broach the subject with all the reasons why you deserve a raise rather than why you need or want one!
- Put your money in money market accounts or certificates of deposit that are earning a higher interest rate than the rate of inflation.
- Invest in stocks. Not all stocks are for everyone. We’ve all seen stocks lose a bundle in the course of a single day. It can be scary. But stocks can also give your finances a nice boost. In fact, experts report that stocks typically produce a 10 percent rate of return — well above the inflation rate. But be sure to discuss your portfolio with a financial expert. Some people feel more comfortable taking a bigger risk. And some people are financially able to bear that risk more than others. Do what’s right for you.
- Get TIPS. Treasury Inflated Protected Securities, that is. These are Treasury Bonds designed to protect you from inflation. With terms of 5, 10 or 30 years, they produce a fixed rate of return. The difference between these and other bonds are that twice a year the Treasury Department adjusts the bond’s value based on the Consumer Price Index — so that as inflation grows, so does the value of the bond.
- Don’t put all your eggs in one financial basket. Create a mix of fixed rate savings such as CDs and bonds along with stocks that have the potential to earn big.