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Personal Finance
Personal Finance
How to Protect Your Spending Power From Inflation
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HOW TO PROTECT YOUR SPENDING POWER FROM INFLATION

Hal M. Bundrick, CFP®
Jun 10, 2022


Many or all of the products featured here are from our partners who compensate
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Inflation — the rise in consumer prices — is a slow erosion of your money over
time. Before 2021, the United States hadn't seen annual core inflation much
above 3% for the better part of 25 years, says Michael Ashton, managing
principal of Enduring Investments, a consulting and investing firm in
Morristown, New Jersey.

So the 8.6% spike seen over the past year in the costs of fuel, used vehicles,
groceries and just about everything else is the kind of sudden and systemic rise
that can give a jolt to most peoples’ everyday spending.

Ashton also says that the COVID-19 pandemic stimulus checks and tax relief,
combined with the reopening of the economy, fed consumer demand but didn't
replace product inventories. The result: shortages that lead to higher prices.

"Having supply chain difficulties is part of what inflation looks like," Ashton
says.

With inflation chipping away at your spending power, how can you protect
yourself?


EXAMINE YOUR SPENDING

 * Trim discretionary spending, voluntary spending in categories like
   entertainment or travel, by just 5%. This is one of those incremental changes
   that isn't that difficult to do and goes directly to your personal bottom
   line.

 * Don't delay a major purchase; prices will likely rise.

 * Shop strategically. Buy more generic brand products and prescriptions. Save
   on necessary expenses by using coupons and store loyalty programs. Use
   membership cards (like Walmart+ and others) to pay 5 cents less per gallon
   for gasoline, or be strategic with which rewards credit card you use for gas
   purchases.


LOOK FOR SAVINGS

 * Eliminate any fees you pay for credit cards or bank accounts (late fees,
   monthly or annual service fees, ATM fees, etc.). Many banks are waiving such
   fees and credit cards often have fee-free options.

 * Renegotiate bills like cable, streaming or cell phone for any possible
   savings.  "I can say from my own personal experience – it's amazing how easy
   this is,” Ashton notes. He says that every time he would call his cell phone
   provider, it would offer him a plan that was far better than his current one.
   “And it doesn't happen unless you call," Ashton adds. He now makes a habit of
   calling once a year and asking, "What's the best plan you have and should I
   be on that?"

 * Reduce the number of subscriptions you have, even if by just one. "You should
   do an audit of those from time to time because sometimes they sneak in a
   price increase, and it just shows up on your credit card," Ashton says.


TRY TO BRING MORE MONEY IN

 * Search for financial institutions that pay higher interest rates than you are
   earning now (if you are earning anything at all). Online banks and credit
   unions often offer high-yield savings accounts that sweeten returns,
   especially as interest rates rise.

 * Perhaps the most powerful idea of all: Ask for a raise. If you haven't
   received an increase in salary in a few years, you've likely experienced what
   amounts to a pay cut because of inflation, Ashton says.


THE INFLATION-MATCHING SAVINGS ACCOUNT

Another inflation-fighting idea: Series I savings bonds. They were created
specifically to protect consumers' purchasing power against inflation, says Zvi
Bodie, professor emeritus in finance at Boston University. Bodie holds a
doctorate in economics from the Massachusetts Institute of Technology and has
become an avid proponent of I bonds.

I bonds rates are keyed to the rate of inflation. They are a perfect safe haven
for near-term savings, and not a bad addition to your long-term nest egg, too.

A minimum investment in I bonds through TreasuryDirect.gov is only $25, and an
individual can put up to $10,000 annually into the savings bonds with electronic
purchases. The bonds pay fixed interest plus the inflation rate, adjusted twice
per year.

You can withdraw your savings without penalty after one year, but if you cash
them in before five years, you'll lose the last three months' worth of interest.

"So what you get is essentially a savings account that can't go down, and that's
going to go up with inflation," Bodie adds. "Do I need to say more?"


INFLATION IS NOT THE SAME FOR EVERYONE

Inflation hit a 8.6% national average in May. But that’s not likely to be your
inflation rate, says Ashton.

You may consume different items than the average person and you may not live in
an average place, so your particular rate of inflation quite likely varies from
the average, according to Ashton.

So, rather than agonizing over a single number as a spending power loss to
recoup, use the small money moves above to improve your financial position
slowly but surely.

This article was written by NerdWallet and was originally published by The
Associated Press. 



About the author: Hal Bundrick is a personal finance writer and a NerdWallet
authority in money matters. He is a certified financial planner and former
financial advisor. Read more


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