If you feel like you have been paying more for everything lately, you are not alone. Inflation has soared over the past year. At 7.5% for the main inflation index, this is a 40-year high. Consumers are seeing their purchasing power erode. Many economists are split on how long the inflation will last. We are going to discuss five strategies that you can implement to help you curb the effects of inflation.

What is inflation?

Inflation is defined as the decline of your purchasing power over time. Also referred to as the ‘silent tax’, this rise in prices is typically displayed as a percentage. It means that your dollar can purchase less today than what it would have a year prior.

One of the most widely used measures of inflation is the Consumer Price Index (CPI) which is calculated by the U.S. Bureau of Labor Statistics. The CPI measures how the cost of a “basket” of consumer goods and services paid by urban consumers changes over time. In the last year, most of our incomes have not risen at the same rate that inflation has, which means that our purchasing power has decreased.

Smart strategies to help you deal with inflation in 2022

1. Be an intelligent shopper: There are so many ways that you can save when shopping if you really want to. There are products that will save you money by forgoing specific branding or unneeded packaging. Purchasing products without the extra packaging will also help the environment so it’s a win-win situation.

Some other shopping tips include:

– Buy extra of what is on sale. Cook in bulk and then freeze the extra meals for a later time.
– Make a shopping list each week so that you only purchase items that you actually need.
– Substitute for similar products such as chicken instead of beef.
– Limit eating out or stop eating out altogether.
– Shop at a less expensive grocery store and use coupons.
– Shop thrift stores, facebook marketplace, and consignment stores for good deals.

2. Make and monitor your budget: So many of us use our cards or autopay for bills and a price increase can go unnoticed. Pay attention to the changes that happen month to month so that you can change your budget accordingly. This will help avoid an emergency situation where you cannot pay off your credit card debt. Track your progress and see how the little changes you make in your budget can help you save money. Regularly revisit your budget to ensure that you are on track to reach your financial goals.

3. Make sure that your cash is earning some sort of interest: One mistake people often make is keeping too much cash in a checking account that earns no interest. Consider moving your money to something like a money market or high yield savings account. While the interest will not likely beat inflation, it will help offset some of the effect of inflation.

If your cash is not earning any interest then inflation will eat away at your cash. For example, if inflation was 4% and you had $100 in cash, then by next year, that $100 would only have $96 worth of purchasing power. This will make a huge difference over the years if the inflation rate stays the same.

4. Maintain a diversified portfolio of investments: If you have an investment portfolio or a 401(k), individual retirement account (IRA) or other retirement account, then you want to make sure that these accounts are diversified. This could include stocks, bonds, index funds and other investment vehicles with varying levels of risk. Some investments can better protect you from inflation.

I Bonds have been a hot topic lately and may also be something that you consider. A good financial planner can be very beneficial when you are looking at diversifying your portfolio. They can help ensure that your investments have the right balance to match or outpace inflation.

5. Build an emergency fund: We always talk about building an emergency fund. An emergency fund is a savings account where you have some money for unexpected expenses. This is the best thing that you can do in case a situation arises where you quickly need money. While it won’t directly protect you from inflation, it can help prepare you if your expenses push you over your usual budget.

Should I change how I invest for retirement during an inflationary period?

Inflation doesn’t really change how you should be saving for retirement. Here at District Capital, we always recommend having diversified investments regardless of whether we are in an inflationary period or not. Don’t make any drastic changes based on the current inflation or changing market conditions as you may regret it. If you have a diversified portfolio then some of your investment may lose value, while others may gain value during those same market conditions. Ride out the waves in the market and your investments will likely pay off in the long run.

Living in an inflationary economy

Avoiding inflation completely is impossible, but you can implement these 7 strategies to help minimize the effect on your finances. Planning ahead is the key to coming out ahead in the long run. You don’t have control over the economic conditions, but you do have control over your spending and saving habits. If you want help with your finances and are interested in having a comprehensive financial plan, feel free to schedule a discovery call with one of our financial advisors at District Capital Management today!