What Is Inflation?
Inflation refers to how much the prices of goods and services increase over time. Rising inflation often results in an increased cost of living, making it more expensive to maintain the same spending habits if your income hasn’t increased as well. This means your purchasing power will decrease as you’ll now be able to buy less with the same amount of money. As such, you may find that inflation is severely impacting your budget by reducing your ability to spend over time.
How can inflation impact your budget?
According to the Bureau of Labor Statistics, the US inflation rate increased by 6.8% over the last year, with the global pandemic being blamed for this increase. This has seriously affected people’s budget with gas, food, and housing all becoming much more expensive in 2021. This has especially hurt those who have their money stored in low-interest savings accounts and retirees without a steady income. More often than not, the interest earned from banks cannot keep up with the high inflation rates which results in a continuous loss of purchasing power over the years.
Inflation doesn’t only increase the cost of living but can also impact some of your investments, which could affect your budget as a result. For fixed-income investments such as bonds or treasuries, inflation can significantly hurt performance. This is because you will earn their interest rate remains the same for the entire duration while inflation is on the rise.
On the other hand, inflation can also have positive effects on your budget especially if you have debts and mortgages to pay with a fixed interest rate. Inflation makes it so that the value of the debt and outstanding payments decrease with time, to your benefit. While you will still be paying the same monetary amount, that amount is no longer worth as much nowadays. This is one example where postponing payments can prove beneficial and positively impact your budget.
How to protect yourself from inflation?
While there is no way to completely avoid the effects of inflation, there are certain steps to take in order to minimize its impact on your budget. These include putting your money in stocks or index funds such as the S&P 500. Another popular hedge against inflation would be investing in gold or gold-related mutual funds.