You’re not the only one feeling anxious about your savings. Recent years have been turbulent for everyone, and when financial concerns are added to the mix, it’s understandable to feel overwhelmed as you strive to make sound financial choices for your future. According to the 2022 Thrivent Consumer Financial Outlook survey*, numerous Americans are grappling with financial stress after almost two years of elevated inflation.
78% desire greater financial flexibility.
63% believe inflation is negatively affecting their financial progress.
60% report that inflation is hindering their ability to save more.
Although you can’t prevent inflation, you can develop a financial plan that considers it and mitigates its impact in the long run. Below are some ways to achieve this.
Understanding Inflation: Definition and Explanation
Inflation is the gradual increase in prices over time, which in turn affects the purchasing power of money. The Consumer Price Index (CPI) is a commonly used measure to track the rate of inflation. It monitors the prices of goods and services, and how these prices change over time for urban consumers.
As prices increase, consumers must spend more money to purchase the same goods and services they previously bought for less. For example, $10 could buy a movie ticket and popcorn in the past, but today, it would likely only cover the cost of a movie ticket. This phenomenon demonstrates how inflation impacts the value of money.
The Federal Reserve typically targets an annual inflation rate of around 2% to be integrated into the economy. However, various global factors, such as the ongoing pandemic, European conflicts, and supply chain disruptions, have contributed to a significant rise in inflation over the past year. The current inflation rate of 8.5% (excluding seasonal adjustment) is the highest in the United States since the early 1980s.
The Impact of Inflation on Savings: Understanding Its Effects
Similar to the movie ticket example, inflation impacts savings by reducing purchasing power. The funds set aside for long-term goals such as retirement or significant purchases may no longer be adequate to cover these expenses since the value of money decreases over time. As a result, in today’s economy where 59% of people claim to live paycheck to paycheck, the added strain on daily finances can make it difficult to find extra funds to save, resulting in slower overall progress toward financial goals.
Strategies to Mitigate Inflation’s Impact on Your Savings
While inflation can strain anyone’s savings, there are specific measures you can implement to alleviate its impact as much as feasible.
Creating and Adhering to a Budget: A Key Financial Strategy
Let’s be honest; at times, abstaining from spending can feel challenging, if not entirely impossible. Having a comprehensive understanding of your expenses can assist in developing a savings strategy that meets both your short and long-term financial objectives. The initial step is to evaluate your budget without any preconceived notions. Track your expenses for a month to determine where your money goes and how much you have remaining. Additionally, be aware of lifestyle inflation, as you may be increasing expenses merely due to increased income, resulting in an uptick in your budget. It’s essential to ensure that you’re not dipping into your savings or retirement funds to maintain your current spending habits.
After tracking your expenses, identify areas where you can make cuts and areas that are non-negotiable. Eliminating expenses that don’t contribute much to your quality of life is simpler. For instance, charitable donations may be a fundamental financial value that you aren’t willing to compromise, while dining out less frequently, cutting back on subscriptions, and shopping more wisely may be straightforward decisions. Saving as little as $50 per week can quickly accumulate, generating $200 per month to counter rising expenses and bolster your savings and retirement accounts.
Creating a Safety Net: The Importance of Establishing an Emergency Fund
The phrase “rainy day fund” comes to mind when contemplating emergency funds. For numerous individuals, 2020 was that rainy day as they encountered job loss or reduced working hours, leaving them to depend on their savings to cover their expenses.
Regarding your emergency fund, it’s recommended to have between three to six months of anticipated expenses saved to avoid tapping into retirement funds or other investments when in need of cash. To offset the effects of inflation, it’s advisable to deposit the money into a high-yield savings account with higher interest rates.
Reassessing Your Retirement Strategy: Why It's Essential
While general savings may be at the forefront of your mind, it’s crucial not to overlook your retirement savings. Suppose you have some time before retirement. In that case, it’s prudent to re-examine your plans to account for the long-term impact of inflation.
Understanding the amount required for retirement can assist in making more informed decisions when it comes to planning and saving. Utilizing a retirement income calculator can determine your current standing and consulting with a financial advisor can help chart a course for the future.
Can Investing be an Effective Strategy to Combat Inflation?
Strategic investing is another viable option for potentially shielding your savings from the effects of inflation. It’s crucial to thoughtfully consider the kinds of investments in your portfolio to accomplish this objective. For instance, stocks and mutual funds may produce mixed outcomes during inflationary periods as it’s challenging to forecast which companies will perform well, and inflation can impact your returns. However, commodities and Treasury Inflation-Protected Securities (TIPS) are alternative investment options that may endure inflation more effectively.
Why Seeking Professional Financial Assistance is Essential
In summary, the longer your savings time horizon, the lower the impact of inflation may be. It’s essential to consider the long-term perspective since economic and market fluctuations can occur. These ups and downs often balance out over time.
While it’s challenging to anticipate the duration of high inflation periods, having an informed strategy in place can alleviate concerns regarding its impact on your family’s finances and way of life. Seeking assistance from a financial advisor can provide a broader perspective, establish a plan aligned with your financial objectives, and instill confidence that you’re making informed decisions.