4 Tips for Managing Rising Inflation

By: Stacey Nickens

Inflation is on the rise, and while the Fed is raising interest rates to try to tamp down on rising costs, your budget is still likely hurting from inflationary pressures. You may see your expenses going up more quickly than your income, and as a result, you may be saving less, not saving at all, or dipping into your savings. However, with rising inflation and volatility in the stock market, it is especially important to maintain your savings and emergency funds. How can you accordingly best manage your spending habits and your savings in order to combat inflationary pressures?

1. Calculate your personal inflation rate. In the United States, inflation is measured by the Consumer Price Index (CPI). The CPI holds a basket of goods and services, and as the prices of those goods and services change, analysts can measure the average inflation rate for the country. According to the CPI, the inflation rate was 8.6% for the 12 months ending in May 2022. Depending on your spending habits, your own personal inflation rate may be higher or smaller. The cost of certain goods is rising more rapidly than the cost of other goods. For example, the cost for new vehicles has risen 12.6% during the past twelve months, while the cost for used vehicles has risen by 16.1%. Depending on whether you purchased a car during the past year, and depending on if that car was new or used, you would have felt the impact of inflation differently than someone who made different decisions.

You can calculate your personal inflation rate in a number of ways. You could compare your monthly expenses in May 2021 to your monthly expenses in May 2022. Take the difference and divide the difference by your May 2021 expenses to find your personal inflation rate. You could also use an online inflation calculator, such as the calculator offered by The New York Times.

2. Use your personal inflation rate to evaluate your spending. First, you may need to cut spending or adjust your budget. For example, pretend that you always set aside $3,000 for discretionary spending each month. If you have budgeted the same amount for the past year, you may need to evaluate if your discretionary spending is actually remaining around $3,000 per month, or if your personal inflation rate has increased your discretionary spending. If you determine that your discretionary spending has increased, you must determine if you afford higher spending or if you need to cut expenses you could previously afford because your overall costs are increasing.

3. Review the rate at which goods and services are increasing in price so you can determine where you can cut spending. If you track your spending through a service such as Mint.com, you can review your spending by category and determine which of your expenses are increasing most rapidly. Below you can review the increase in prices for certain items. You may accordingly find that your utility bills have gone up and work to implement energy-saving methods in your home. You may delay travel due to rising airfare, or decrease your meat consumption to save on groceries. As you know, gas inflation is quite high right now, so driving less through carpooling, using public transit, or consolidating errands will certainly help your budget.

The following list shows the increase in prices for certain items:

• Meats, poultry, fish and eggs: 14.2% increase
• Fruits and vegetables: 11.8% increase
• Electricity: 12% increase
• Utility (piped) gas service: 30.2% increase
• Airline fares: 37.8% increase
• Household cleaning products: 9.9% increase

4. Consider investing your liquid assets with an eye on earning slightly higher returns than traditional savings vehicles. Savings accounts yield very low returns. For example, the Bank of America Advantage Savings account current offers an annual interest rate of 0.01%. You could consider putting some of those funds into safe, higher-interest vehicles, such as Treasury Bills. As of June 17, the three-month Treasury Bill was yielding 1.58%. A Treasury Bill is issued for terms of 4, 8, 13, 26, and 52 weeks, and these bills are sold at a discount. At the bill’s maturity, purchasers receive the par value of the bill, and their interest income is the difference between the bill’s maturity value and the discounted value. With a yield of 1.58%, $500 invested in a three-month treasury bill would earn around $8 in three months. Comparatively, $500 invested in a savings account earning 0.01% interest would only earning $0.05 in the same time period. $8 in income is 160x greater than just $0.05 in income, and you are still not assuming risk for the greater return. U.S. Treasury bills are considered risk-free because they are backed by the “full faith and credit” of the U.S. Government.

While putting all of your liquid savings in Treasury Bills is likely not advisable, you could invest a portion in bills that mature at different times. Investing in bills that mature in 4, 8, 13, 26, and 52 weeks will allow you to earn back your investment quickly, making it liquid in the event of an emergency, and if you don’t need the funds, you could reinvest them at a potentially higher interest rate. With the Fed raising interest rates by 0.75% at their last meeting, interest rates will likely continue going up, and investing in money market securities and cash equivalents with various durations will allow you to take advantage of rising interest rates at different points in time. You can purchase Treasury securities by creating and using a TreasuryDirect.gov account.

Overall, reducing expenses and increasing your returns could help you financially manage higher costs. Please reach out to our experienced financial planning team if you would like assistance in navigating this challenging economic environment.