How to Budget for Inflation and Higher Prices – Forbes Advisor

Inflation, or a prolonged period of rising prices, can dramatically reduce your budget. Most of 2021 saw inflation rise steadily, with the Consumer Price Index (CPI) rising 6.8% year-on-year in November.

Higher prices mean you may need to be more strategic in your spending to increase your income. Learning to budget for times of higher inflation can help you rethink how you spend and potentially find money to save.

1. Streamline your mortgage costs

If you own your home, your mortgage can be one of your biggest budget costs. When rising inflation comes along with falling interest rates, you may have the opportunity to save money by refinancing.

So how do you determine if refinancing makes sense?

First, think about what rates you’re likely to qualify for based on your credit scores and income. Then compare that to your current interest rate. A mortgage refinance calculator can help you easily calculate the numbers.

Next, think about how long you plan to stay in the house and how much you might have to pay in closing costs for a mortgage refinance loan. If you plan to stay in the house for at least long enough to break even, which means you are getting back what you pay for the closing costs in interest savings, it could make refinancing worthwhile.

If you can’t refinance your mortgage, here’s another way to save: Shop around for a better home insurance deal. Finding a cheaper policy could help cut your budget and save you money.

2. Reduce rates on other debts

In addition to a mortgage, you may be budgeting for debt on credit cards, student loans, or other lines of credit. Paying off debt, or at least making it cheaper, can help when prices go up.

If you have credit card debt, for example, you may want to consider a 0% APR balance transfer offer or a low-interest personal loan from your bank. A 0% balance transfer can give you time to pay off what you owe without interest. Personal loans, on the other hand, can help you consolidate high interest debt at a lower fixed rate.

Even with the student loan forbearance extended until May 1, 2022, you will also need to budget for these payments. Refinancing student loans could help you get a lower rate, making monthly payments more manageable. Keep in mind that refinancing federal loans to private loans means sacrificing certain benefits and protections, including coronavirus forbearance options and loan cancellation.

3. Perform an energy audit

Energy prices are one of the main drivers of inflation. When different sources of energy, including coal, natural gas, fuel oil and electricity, cost more, the cost of producing and transporting consumer goods also increases. The companies that produce or transport these goods then pass the higher prices on to consumers.

Budgeting for higher prices means taking into account how much energy you use in the home and finding ways to cut costs as much as possible. According to the US Department of Energy, here are some simple ways to reduce energy use at home or on the road:

• Sealing air leaks around windows and doors
• Have your HVAC system cleaned and maintained in the spring and fall
• Use energy efficient light bulbs
• Set your thermostat lower in winter and higher in summer
• Unplug electronics when not in use
• Properly inflate your tires
• Carpooling to share fuel costs
• Consolidation of car journeys and speed limits

These are just a few of the things you can do to potentially cut back on energy and fuel costs in order to put money back into your budget.

If you are struggling with higher energy prices, you may want to consider turning to the Low Income Home Energy Assistance Program (LIHEAP). This program provides eligible households with financial assistance to pay their heating and cooling bills.

4. Save on auto insurance

As mentioned, changing home insurance is a money-saving opportunity when budgeting for inflation and higher prices. But you might also want to rethink your other insurance coverages.

Here are some ways to save money on auto insurance, for example:

• Increase your deductible, which could lower your monthly premium
• Negotiate a Safe Driving Discount
• Reduction of coverage, if applicable
• Compare quotes and change auto insurance company for a better price

5. Eliminate unnecessary subscriptions and fees

You may be wasting money every month on subscription or streaming services. According to JD Power, the average household has 4.5 streaming services and spends an average of $ 55 per month on them.

It might not seem like much, but $ 55 a month makes over $ 600 a year. If you’re trying to cut back on spending in the face of higher prices, giving up unused subscriptions can be a good place to start.

There are apps that can make it easier for you if you don’t have time to track down all of your subscriptions. Personal finance apps like Mint and Truebill connect to your bank and credit card accounts, find the subscriptions you’re paying for, and can help you cancel them if you decide you don’t need them anymore. or you don’t want it anymore. Some apps can even help you negotiate better deals on cable, internet, and cell phone services to save extra money or reduce what you pay for bank charges.

Speaking of bank charges, changing banks is another thing you might want to consider. On average, checking account fees can cost you $ 32 per month or almost $ 400 per year. So changing banks or finding a new checking account can be a good way to put money back into your budget when trying to offset inflation.

6. Shop smarter at the grocery store

Year over year, grocery prices increased 5.4% between October 2020 and October 2021. Feeding your family is not something you can ignore, so finding food is important. ways to budget for groceries wisely when prices go up.

Here are some money-saving tips to help you manage your grocery budget:

• Trade in branded items for generic items as much as possible.
• Buy in bulk if it allows you to purchase items at a lower unit price.
• Incorporate more meatless meals into your family’s menu.
• Use weekly grocery store flyers to plan budget meals.
• Shop the local farmer’s markets if that’s an option where you live.
• Incorporate more inexpensive staples into your meals, like pasta or rice.

You can also use budget apps to reduce your grocery expenses. With Ibotta, for example, you can earn money on your grocery purchases at partner stores. It can be a simple way to fight inflation and rising prices at the supermarket.

7. Make room in your budget to invest

For some people, times of rising prices may seem like the wrong time to invest. Why put money on the stock market when you face higher monthly costs?

Here’s a better way to think about it: Whether you’re investing for retirement or other goals, you need to maintain regular contributions no matter what happens in your financial life. After all, one of the reasons you invest in the first place is to fight inflation by maintaining and increasing the purchasing power of your savings over the long term.

That said, if your budget is under pressure, you may want to consider reducing your contributions in the short term. Just be sure to restore and possibly increase the contributions once the pressure is released.

There are investments specifically designed to help you beat inflation. Take Bonds I, a nearly risk-free investment that pays an annual interest rate of 7.12% until at least April 2022. When inflation rises, I bonds are designed to pay you more.

You may be able to supplement your income if you invest in dividend paying stocks. A dividend is a share of a company’s profits. Some SOEs actually profit from inflation because they are able to raise prices and earn larger profits, which could be passed on to you in the form of dividends.

8. Increase your income if possible

One of the biggest problems with inflation and rising prices is that incomes don’t increase as a result. While the Great Resignation of 2021 prompted some employers to raise workers’ wages, pay rates in the United States have remained largely stagnant for decades.

Finding ways to increase your income can make prolonged periods of inflation more manageable and easier to budget. Some of the possibilities for increasing income may include:

• Sell ​​things you don’t need
• Negotiate a salary increase with your current employer
• Change jobs to pay better
• Take a part-time job or a second job
• Start a secondary activity
• Starting a small business

Each option has its pros and cons, as well as its risks and benefits. But increasing your income can be one of the best ways to protect yourself and your budget against the impacts of inflation over time.

Final result

Inflation can make household budgeting more difficult, but it’s still important to stick to your spending plan as much as possible. When prices go up, you have the flexibility to revisit your budget and decide which expenses to prioritize and which you may be able to reduce or eliminate. The more fat you can reduce, the less stressful budgeting will be and the more money you will have to spare.