In order to build wealth, you should aim to spend your savings consciously. But with inflation reaching levels not seen since the 1980s, more than 32% of Americans say they’ve made no progress towards saving for retirement. Instead, a large percentage are worried about paying for groceries, gas and monthly bills, tapping their savings to offset the rise in prices. In fact, according to data analysis from the World Economic Forum, Americans saved only 4.4% of their disposable income in April 2022 – the lowest levels since the 2007 Financial Crisis and down from 12.6% a year earlier.
With prices continuing to rise, here are a few tips to help guard against inflation and keep saving even when your wallet begins to pinch.
What is inflation?
In simple terms, inflation measures how much more expensive a typical set of goods and services has become over a set period of time, usually a year.
For example, the September 2022 Consumer Price Index from the U.S. Bureau of Labor Statistics shows an inflation rate of 8.3% for all items. This means that, across the board, prices are 8.3% higher than the same time last year. Drilling down further, the same time period saw an 11.4% increase in the price of food, while energy prices rose a whopping 23.8%.
Why is high inflation bad for consumers?
Governments aim to stabilize inflation rates, since most experts agree that low, stable and predictable price increases are good for the economy. Prices change all the time, like when your salary increases and the cost of mortgages goes up or down. On the other hand, high inflation rates – where your gas, for instance, jumps from $4 to $5 a gallon overnight – can actually destabilize entire countries, like in the extreme hyperinflation cases of Zimbabwe and Nicaragua.
When everyday prices rise faster than wages, your purchasing power (or the amount you can buy with the same income) falls. You as a consumer are worse off than before. You might save less or not save at all. You might reduce how often and where you go out to eat. You could buy less clothes and travel less, or choose cheaper items and vacations. All this reduces your consumption, which means businesses have less customers and make less money. Some will fail. High levels of failing businesses are bad for banks and financial institutions, related to high levels of debt and bankruptcy. It leads to a huge spiral of economic contraction, and no one really ends up happy.
How to reduce inflation’s effect on your everyday life
The U.S. Federal Reserve is already making an effort to reduce inflation and bring it back to acceptable levels. However, until prices stabilize, there are several steps you can take to reduce inflation’s effect on your everyday life.
- When going grocery shopping, shop smartly. Walmart reported that three-quarters of its 2022 second quarter market gains came from an increase in customers making over $100,000 per year, and that’s for good reason. The company excels in maintaining a solid distribution network that helps keep their prices low. That watermelon you could buy for $7 elsewhere? Discount stores might be offering it for $3. Even within your preferred stores, you can shop sales instead of buying your usual food items. Seasonal vegetables and fruits often drop in price, and as an added plus, rotating your food choices is considered rather healthy.
- Buy clothes out of season. Clothes frequently go on sale when the season ends, with discounts cutting as much as 50-75% from the regular purchase price. Think of buying that sweater in spring or summer, or that swimsuit in winter. You could also buy clothes at popular, cheap retailers like Shein or Amazon – although many times these items don’t last. If you’re shopping for children, you can buy everyday layering essentials to withstand the change in fashions and make them last longer. Buying larger clothes in anticipation of a child’s growth might seem a smart choice, but the chance it will fit next season is dicey.
- Buy in bulk when you can. Although this step works to reduce your expenses even when inflation isn’t high, buying in bulk at Costco or BJ’s can also help guard against price increases. Of course, buying bulk means you’ll fork out even more upfront and may not be possible for every household. The poor man’s tax is a real phenomenon, and sticker shock at the register can take time to dissipate. Nevertheless, buying in bulk means your average price per item is often lower than buying one at a time, and if you buy it before prices increase yet again, you’ll have saved yourself that little bit more.
- Travel before and after high season. Again, this tip works as part of a general conscious spending philosophy, but it also helps during times of high inflation. If you have the funds to travel and indulge, traveling just before and after high season at your destination can help shave half of the costs from your travel budget. Locations usually lower prices during off-season to entice customers, and you can use that to your benefit to spend less.
- Change your investment strategy for a time. Bond owners and stock investors often suffer during times of prolonged high inflation. Bond investors can change their investments to index-linked bonds, where interest rises in line with inflation, like I-Bonds. Stock investors can protect themselves by taking more defensive positions. Even annuity owners can look to inflation-linked annuities. Above all, try not to lock away all your funds in cash, since you’ll want to take advantage of the change in the market when prices do begin to stabilize again.
Bottom line
Not all inflation is bad for the economy, but uncontrolled and high levels can absolutely devastate your pocketbook. Adjusting your spending and saving habits to accommodate for high inflation can save you significant amounts at the register, and many times it’s as simple as changing your timing to take advantage of sales and discount prices. Aim to protect your purchasing dollars to continue saving where you can, and when the situation improves, you’ll have ingrained smart shopping habits that continue to help you build wealth far into the future.
