Personal Financial Tips for the Inflationary Environment

In May, the inflation rate reached 8.6%, the highest rate in 40 years. In periods of elevated inflation, the price of goods and services (including basic necessities like gas and groceries) rises at a faster rate than normal. And when wages remain flat—as they have for many people this year—this unexpected increase can erode the purchasing power of individual consumers.

When combined, these factors can put a significant strain on your personal finances. In this article, we will share some personal financial tips that may come in handy as you navigate the current inflationary environment.

Avoid unnecessary car costs

During the COVID-19 pandemic, roughly 7 in 10 American workers transitioned to remote work —and as a result, many Americans began to reconsider their living arrangements. An estimated 15.9 million Americans moved during the first six months of the pandemic, and the majority moved out of big cities and into smaller, less densely-populated areas.

Demand for cars increased significantly during this period; unfortunately, due to a shortage of semiconductors and microchips, automotive manufacturers were unable to produce enough new vehicles to meet that demand. That led to a massive spike in demand for used cars which, in turn, sent used car prices soaring by 45% in the past year—and those prices still haven’t come down.

If you’re in the market for a car (especially a used car) try to avoid purchasing one in the current environment. Used car prices will likely come down over time, especially as the supply shortages ease and manufacturers are able to increase production on new cars, so delaying buying a car may help reduce the financial impact of the purchase.

Additionally, if you are leasing a car and your lease comes due, you may want to consider taking advantage of the buyout option. In this environment, the cost to buy your leased vehicle outright may be considerably lower than what that same car would cost on the used-car lot.

Delay big-ticket purchases

During periods of high inflation, it’s not uncommon for people to rush into purchasing big-ticket items—home furnishings, appliances, apparel, and so forth—out of fear that the prices will continue to go up. However, we suggest delaying big-ticket purchases for as long as possible; it’s more likely that demand for these items will slow over time as prices increase, and retailers may be in a position to unload their excess inventory, which should lead to attractive sale and clearance prices.

Selling your home? Be patient

The Federal Reserve does not set mortgage rates, but Fed policies can have an impact on mortgage rates. As the Fed increases its rates to counteract inflation, mortgage rates have followed suit; the average 30-year mortgage rate has nearly doubled in the past year, from 2.96% in June 2021 to 5.23% today. This means that potential buyers may decide to wait until rates come down before purchasing a home. Housing supply is still tight, so if you’re selling your home it’s likely you’ll ultimately find a buyer; however, you should plan on the sale process taking longer than normal due to rising mortgage rates.

Reduce credit card debt

Most credit cards have a variable rate that, like mortgage rates, fluctuates according to the Fed’s interest rate benchmark. With the federal funds rate rising, the prime interest rate does as well, and credit card rates will likely rise as a result. To avoid getting charged more in interest, you may want to limit your credit card purchases—or put them on a credit card that doesn’t charge interest if the balance is paid in full each month.

Eliminating credit card debt should be a priority during this time, as an increase in the variable rate can lead to a significant increase in the interest you will have to pay. You may also want to consider a balance transfer: some card issuers are currently offering zero interest for 15 or more months on transferred balances, which can help you avoid accruing more interest while you pay down the principal.

Take advantage of savings opportunities

With the average price of a gallon of gas hovering around $5 nationwide, it’s a good idea to take advantage of supermarket loyalty programs that offer discounted fuel prices for members. If you choose to do this and you tend to shop at multiple grocery stores, try to consolidate your grocery spending toward supermarkets with the best loyalty programs, in order to maximize the fuel savings benefits.

You may also want to review your household purchases to identify the items you tend to buy and use most frequently. Then, research prices at wholesale retail chains to determine if buying those items in bulk at those stores will reduce the overall cost of your household goods.

Thinking about a vacation? Be flexible

Like most Americans, you could probably use a vacation right now. But rather than potentially overspending on a trip to a pre-planned destination, consider taking a different approach. By being flexible about the location and even the dates you travel, you can significantly reduce travel costs. In addition, if you have points or airline miles saved up, now may be a great time to use them and save even more on the cost of your vacation.

Closing Thoughts

These are just a few of the strategies you can employ to keep your personal finances on an even keel while we navigate this uncertain economic landscape. As always, if you would like to discuss how Telemus can help you effectively manage your financial life, don’t hesitate to get in touch with our team.

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