Donald Williams from Williams Accounting and Consulting (Courtesy Image)
Gas prices are high. Food costs are rising. Everything is going up and it’s all due to inflation. While the war in Ukraine was the catalyst for prices to go soaring, the domino effect only seems to get worse. Experts have concluded that the increases in prices will only continue to go up
In an effort to avoid another recession, The Federal Reserved raised its benchmark interest rate by 0.75 percent. Interest rates are the federal governments main tool to combat inflation, with the goal of decreasing the amount of spending. Rasing the interest rate is considered to be one of the more aggressive tactics that The Federal Reserve can take and a signal to things are getting very serious.
But what should individuals and families be doing during this time. With no foreseeable end to the affects of inflation, it’s important for people to mitigate the damage to their personal finances that all of this is causing.
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Here are seven helpful personal finance tips that individuals can utilize immediately to protect themselves during this uncertain time:
- Accelerate Purchases: An individual will want to accelerate purchases of goods and services that the individual knows will be needed in the next year, because such goods and services will be more expensive in the future. For example, an individual will want to now purchase non-perishable food/grocery items such as canned goods, toilet paper, and cleaning supplies, and will want to now hire contractors to perform home repairs, since postponing such payments will result in having to pay higher prices in the future.
- Purchase Goods in Bulk/Bundle Services: An individual will want to start buying goods in bulk. For example, an individual will want to buy consumable goods (examples: paper towels, toothpaste, hair products, shaving products, etc.) in bulk in order to obtain a lower per unit price on such goods now and to avoid having to buy such goods in the future at higher prices. For services, an individual will want to try to bundle phone and data, home Internet, software, and other recurring services for more favorable pricing.
- Consider Home-Equity Loans: In order for an individual to be able to make purchases of goods and services now and to buy goods in bulk, the individual may need to take on some productive debt. Productive debt includes home-equity loans, which allows an individual to borrow against the equity in the individual’s home at a relatively loan interest rate. The borrowed funds can be immediately used to make purchases now at prices that are lower than they will be in the future. Furthermore, since inflation effectively decreases the value of the dollar over time, having to repay the home equity loan principal payments in the future will be effectively less expensive since those repayments will be made with less valuable dollars. Productive debt does not include, however, any credit card debt, as credit card debt should be avoided at all times, including during inflation.
- Buy Off-Brands: An individual will want to buy off-brands goods, especially with grocery purchases, during periods of inflation. Off-brands goods involving cereal, detergent, cleaning supplies, and many other food products can often save the individual 10-15 percent compared to the named-brands goods, while still allowing the individual to benefit from substantially the same quality. These price savings can offset the higher prices resulting from inflation.
- Put Extra Cash into Interest-Bearing Investments: With inflation, cash that is not bearing any interest is effectively losing value, because $1 today will have less buying power in the future. An individual will want to make sure that any extra cash is invested in interest-bearing accounts or other investments so that the extra cash is not losing value, as the interest helps to offset the decrease in value caused by inflation. During inflation, interest rates normally rise. Extra cash can be invested into interest-bearing savings accounts, money market accounts, or certificates of deposits, or it can be loaned out to other persons for interest, or it can be invested into stocks and bonds that provide returns in the forms of dividends and yield that keep up with the rising inflation costs.
- Buy and Hold Real Estate: An individual will want to buy and hold real estate during inflation. Real estate values generally increase with inflation, so the buyer and holder of real estate will see their equity value of real estate increase, enabling the holder to retain wealth and borrow against the higher real estate values. This differs from holding cash or some other types of investments that are much less likely to increase with inflation.
- Consolidate Vehicle Trips: Gasoline prices often increase during periods of inflation. For an individual who likes or needs to drive a gasoline vehicle, the gasoline prices can cut into the individual’s savings. Planning and consolidating trips with the gasoline vehicle allows the individual to reduce the miles driven and the amount of gasoline needed. For example, if the individual needs to go to the hair solon, the grocery store, the gym, and the gas station, instead of taking four separate trips, the individual should consolidate all of those trips into one trip.