How to budget for inflation and higher prices – Forbes Advisor
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Inflation, or a prolonged period of rising prices, can significantly reduce your budget. Most of 2021 has seen inflation rise steadily, with the consumer price index (CPI) rising 6.8% year-on-year in November.
Higher prices mean you may need to be more strategic in your spending to increase your income. Learn to budget for periods of higher inflation can help you rethink how you spend and possibly find some money to save.
1. Streamline your mortgage costs
If you own your home, your mortgage can be one of your biggest budget expenses. When rising inflation is accompanied by falling interest rates, you may have the opportunity to save money through refinancing.
So how do you determine if refinancing makes sense?
First, consider the rates you’re likely to qualify for based on your credit scores and income. Then compare that to your current interest rate. A mortgage refinance calculator can help you run the numbers easily.
Next, think about how long you plan to stay in the home and how much you might have to pay in closing costs for a mortgage refinance loan. If you plan to stay in the house at least long enough to break even, i.e. get back what you pay for closing costs in interest savings, this could make refinancing worthwhile. .
If you can’t refinance your mortgage, here’s another way to save: Shop around for a better deal on home insurance. Finding a cheaper policy could help you cut your budget and save some money.
2. Reduce rates on other debts
Besides a mortgage, you can budget to pay off your debts on credit cards, student loans, or other lines of credit. Paying down debt, or at least making it cheaper, can help when prices rise.
If you have credit card debt, for example, you might consider a 0% APR balance transfer offer or a low-interest personal loan from your bank. A 0% balance transfer can give you time to pay off what you owe without interest. Personal loansmeanwhile, can help you consolidate high-interest debt to a lower fixed rate.
Even with student loan forbearance extended until May 1, 2022, you will also need to budget for these payments. Refinancing student loans could help you get a lower rate, making monthly payments more manageable. Keep in mind that refinancing federal loans to private loans means sacrificing some benefits and protections, including coronavirus forbearance options and loan forgiveness.
3. Perform an energy audit
Energy prices are a major driver of inflation. When different sources of energy, including coal, natural gas, fuel oil and electricity, become more expensive, the cost of producing and transporting consumer goods also increases. Companies that produce or transport these goods then pass on the higher prices to consumers.
Budgeting for higher prices means considering how much energy you use at home and finding ways to cut costs as much as possible. According to the US Department of Energy, here are some simple ways to reduce energy consumption at home or on the road:
- Seal air leaks around windows and doors
- Have your HVAC system cleaned and serviced in the spring and fall
- Use of energy efficient light bulbs
- Set your thermostat lower in winter and higher in summer
- Unplug electronic devices when not in use
- Properly inflate your tires
- Carpooling to share fuel costs
- Consolidate car journeys and respect the speed limit
These are just a few of the things you can do to potentially reduce your energy and fuel expenses to put money back into your budget.
If you are struggling with higher energy prices, you may consider checking out the Low-Income Household Energy Assistance Program (LIHEAP). This program provides eligible households with financial assistance to pay their heating and cooling bills.
4. Save on car insurance
As mentioned, switching home insurance is an opportunity to save money when budgeting for inflation and higher prices. But you may also want to rethink your other insurance coverages.
A few ways to save money on car insurancefor example, include:
- Increase your deductible, which could reduce your monthly premium
- Negotiate a discount for safe driving
- Reduce coverage, if applicable
- Compare quotes and change car insurance companies for a better price
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5. Eliminate unnecessary subscriptions and fees
You may be wasting money every month on subscription or streaming services. According to JD Power, the average household has 4.5 streaming services and spends an average of $55 per month on them.
It may not seem like much, but $55 a month is over $600 a year. If you’re trying to cut costs in the face of higher prices, dropping unused subscriptions can be a good place to start.
There are apps that can make it easier for you if you don’t have time to find all your subscriptions. personal finance apps as Mint and Truebill are tied to your bank account and credit card accounts, track the subscriptions you pay for and can help you cancel them if you decide you no longer need or want them more. Some apps can even help you negotiate better deals on cable, Internet, and cell phone services for additional savings or lower bank charges.
Speaking of bank charges, changing banks is another thing you might consider. On average, current account fees can cost you $32 a month or almost $400 a year. Thus, changing banks or finding a new current accountcould be a good way to add some cash to your budget when trying to offset inflation.
6. Shop smarter at the grocery store
Year-over-year, grocery prices rose 5.4% between October 2020 and October 2021. Feeding your family isn’t something you can ignore, so it’s important to find ways to budget wisely for groceries when prices rise.
Here are some tips to help you manage your grocery budget:
- Replace branded items with generic items whenever possible.
- Buy in bulk if it allows you to purchase items at a lower unit price.
- Incorporate more meatless meals into your family’s menu.
- Use weekly grocery store flyers to plan affordable meals.
- Shop at local farmers’ markets if that’s an option where you live.
- Incorporate more low-cost staple foods into your meals, such as pasta or rice.
You can also use money saving apps to reduce your grocery expenses. With Ibotta, for example, you can earn money on your grocery purchases at partner stores. This can be a simple way to fight inflation and rising supermarket prices.
7. Make room in your budget to invest
For some people, periods of rising prices may seem like the wrong time to invest. Why would you invest money in the stock market when you face higher monthly costs?
Here’s a better way to think about it: whether you’re investing for retirement or other goals, you need to maintain regular contributions no matter what’s going on in your financial life. After all, one of the reasons to invest in the first place is to fight inflation by maintaining and increasing the purchasing power of your long-term savings.
That said, if your budget is under pressure, you might consider reducing your dues in the short term. Just be sure to restore and possibly increase contributions once the pressure subsides.
Some investments are specially designed to help you fight inflation. Take I’m readingan almost risk-free investment that pays an annual interest rate of 7.12% until at least April 2022. When inflation rises, I bonds are designed to earn you more.
You may be able to supplement your income if you invest in dividend-paying stocks. A dividend is a share of a company’s profits. Some public companies actually benefit from inflation, as they are able to raise prices and make larger profits, which could be passed on to you in the form of dividends.
8. Increase your income if possible
One of the biggest problems with inflation and rising prices is that incomes don’t rise accordingly. While the big quit of 2021 prompted some employers to raise workers’ wages, pay rates in the United States have remained largely stagnant for decades.
Finding ways to increase your income can make periods of prolonged inflation easier to weather and budget for. Some of the opportunities to increase income could include:
- Selling things you don’t need
- Negotiate a raise with your current employer
- Change jobs to pay better
- Take a part-time job or a second job
- Start a secondary agitation
- Start a small business
Each option has its advantages and disadvantages, as well as risks and rewards. But increasing your income can be one of the best ways to protect yourself and your budget from the effects of inflation over time.
Inflation can do household budgeting harder, but it’s still important to stick to your spending plan as much as possible. When prices rise, you have the opportunity to review your budget and decide which expenses to prioritize and which you can reduce or eliminate. The more fat you can cut, the less stressful budgeting can be and the more money you can have save money.