Have you noticed everything is getting more expensive of late? You don’t have to be an economist to figure that out. It’s reported that in America that the rate of inflation increased by nearly 5% in the past year.
What are some common things that are costing American consumers more? Let’s cherry pick some “fun” stats that can help us understand where things are getting more expensive. Lumber prices are up 255% over the past two years. Gasoline prices are up 49% from the prior year. Used car prices are up 21% in the past year. Housing prices soared a record 17% from the prior year! Food prices are up 3.5% from last year.
Why are things getting more expensive? There are a lot of different factors. For one thing, our government has had no problem spending like a drunken sailor (more so than usual), and making the proverbial money machine go “brrrrrrrrrr…..”. There’s also issues related to pent up supply and demand related to issues from COVID. And of course, historically low interest rates when it comes to borrowing has made it very easy for a lot of people to borrower a lot of money at super low rates.
While most economists seem to believe the inflation we’ve experienced over the past couple of years is a temporary surge that will likely flatten out and return to normal in the next year or so… at the end of the day, who really knows what the future holds regarding inflation?
So that got me to thinking, as a 38 year old guy who has never had to live through a serious inflationary environment, like what was experienced in the late 70’s and early 80’s when interests rates were as high as 20%, how can you and I adapt our personal financial lives in order to better deal with the inflationary period that we are currently facing?
I put this question out there on Facebook and Twitter and talked to several people about this issue. And in today’s podcast, I want to briefly talk about some ways we can better order our personal finances in order to navigate the expensive times that aren’t going away quite yet.
(Disclaimer: I am a mortgage underwriter for a living. My opinions here are just my personal opinions, and not that of my employer. This information is for educational purposes only. Please be sure to talk to an a certified financial advisor before making any decisions regarding your finances.)
1. Avoid Consumer Debt
If the price of everything is going up, the last thing you need to do is frivolously take on personal debt obligations that further compound the problems associated with inflation. If the cost of lumber is up 255% over the past year at Home Depot, the last thing you need to do is tack on another 20% in annual interest payments on a Home Depot credit card. Not to get too Dave Ramsey sounding, but sometimes debt is just dumb. If you can absolutely avoid taking on any new consumer debt, you should probably do so.
2. Refinance Your Mortgage
With interests rates on home mortgages being near record lows, with the current FHLMC 30 year fixed rate currently being at 2.99%, you just may want to consider refinancing your mortgage if you haven’t already done so. If you are going to have to live in your home for the next 30 years, you might as well do everything within your power to lower the costs of owning your home. Of course, refinancing may not be for everyone, so be sure to talk to your local loan officer to find out if it’s a good decision for you.
3. Invest Your Savings
If inflation is going up 5% a year, if your money is just sitting in a checking or savings account earning 0.01% in interest, that means your money is actually losing 4.99% of it’s value by sitting in your savings account. You are poorer for saving your money, and you might as well set 5% of it on fire every year. And you might think losing 5% of your money every year isn’t such a huge deal. But imagine if that happens for 5 years in a row! If you have $10,000 that loses 5% of it’s value every year for 5 years, that means your $10,000 will be be worth only $7,737.81 in 5 years. That’s a 22% loss of your money! The only way you can combat that? Make investments that earn more than 5% a year in return. Of course, you are never guaranteed to make a 5% return on your investment. You could actually lose all your money. But, historically speaking, the stock market has averaged a 10-11% return on investment since 1926, and an 8% return since 1957. So invest wisely. And avoid investing in things like Gold or Bitcoin, which are extremely risky things to invest in.
4. Invest In Yourself
If the cost of everything is going to go up, one of the only ways to consistently get ahead is to get a raise. For example, if your employer doesn’t give you an annual raise, even in low inflationary environments of 1-2%, that means you are making 1-2% less each year to do the exact same job. Hopefully your employer gives you an extra 1-2% base salary increase each year! But if not, then in order to get ahead, you are going to have to invest in yourself, so that every couple of years, you obtain a better paying job. What “investing in yourself” looks like will be different for every person. But at minimum it means leveraging your current job to take on new roles and responsibilities so that you can grow your way into a better job every few years. As I talked about previously, I recently changed jobs. In fact, I have done so every couple of years since I’ve been employed. And I’ve done this by using every job as an opportunity to grow into my next job. A job, that I’m always on the lookout for, even from the very first day of employment at any job I get, and a job that pays more than I’m currently making.
5. Buy Experiences, Not Things
Every dollar you spend, you spend in exchange for something else. If you buy material goods, those typically become depreciating assets that lose value over time. Eventually, your treasures becomes junk. So instead of incessantly buying things that end up in a landfill one day, buy the things nobody can take from you. Buy experiences. Go places. Try new things out. Hang out with friends and family. Give back to your community. Put your money to use on things that don’t have a price tag, things that inflation cannot eat up and destroy. Make memories that will last the rest of your life, and not simply things that will have to be thrown away and replaced in a couple years.
6. Live Frugally And Modestly
Don’t just within your means, live below your means. Create as much financial margin in your life as you can. Consider making a budget (if you must). Of course, this can be very hard if you are living paycheck to paycheck, or are on a fixed income. But do you really need 13 internet subscriptions to streaming TV services? Pick one or two that make you happy, and stick to those. Don’t chase after the latest and greatest gadget or gizmo. Don’t buy the hottest items in fashion, or brand name clothes. Cook at home instead of always eating out. And while you can certainly own nice things, just make sure your nice things don’t own you.
7. Be Mindful Of Your Health
This is something I’ve been increasingly mindful of in the last couple of years. But one thing that a lot of people don’t consider when it comes to their personal finances is their health. Healthcare isn’t free. And no matter what your politics is on that particular issue, there are few things more financially devastating to an individual than to lose their health. Healthcare is expensive. And even if it were “free,” if we don’t have our health, we don’t have anything at all. I’m a fat guy, and realize I’ve made a bunch of bad choices over the years that I need to change. So I’m doing what I can to change them, and to improve my health. I’ve been doing my best to better watch what I eat lately, to go on long and frequent walks, and to try and move as much as possible. You don’t have to crush it at the gym every day to improve your health. But it certainly pays to be mindful of your health.
Sound advice all round, Jimmy.