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Costs of inflation: Its effects & how to adjust your budget

Man going over invoices in office
Erik Von Weber/Getty Images

With prices rising across the board due to inflation, many people are trying to make their money stretch further. According to Thrivent's 2022 Consumer Financial Outlook Survey, 63% of consumers feel that inflation is pushing them off track financially. During times like these, it's easy to feel like you lack control over your financial situation. While you can't control the rising prices, you have more control over your financial situation than you might think.

So how can you overcome this recent pandemic inflation surge and feel confident about your financial present and future? Start with a general understanding of inflation and strategies to help overcome its costs in your personal savings and budget.

What is inflation?

In short, inflation is an increase in prices over time. On a larger level, this means your purchasing power declines as inflation goes up. As the prices of goods and services rise, your money doesn't stretch as far as it did in the past.

Why having a budget matters

To lessen the impact of inflation, it's important you have a solid budget in place to help guide your spending decisions. Creating a budget begins with looking at how much money you have coming in each month and how much you can afford to spend on your necessities, like rent and food. You'll then have a better idea of how much money you're able to allocate to other expenses, whether it's toward your savings goals or fun purchases like a family outing. Laying out a budget also gives you a chance to evaluate where you can cut back your spending. The Thrivent survey found that 82% of people who are actively following a household budget find it to be very or somewhat effective for improving financial health.

Just make sure to keep an eye on how lifestyle creep—where your spending habits increase along with your salary—can impact your budget. Knowing what you can afford can help you avoid overspending, allowing you to adjust for rising costs of inflation.

How to adjust your budget for inflation

Cost increases can add up—even if they seem small. Higher prices at gas pumps and grocery stores can chip away at tight budgets. It's understandable that the majority of consumers (78%) from the Thrivent survey wish they had more breathing room in their finances.

To help balance out higher prices, let's look at some budgeting strategies for reducing spending and increasing savings during times of inflation. These strategies can help make your budget a bit more flexible and provide much-needed breathing room.

Establish an emergency fund

While it may sound counterintuitive to stretch your money even further by establishing a new savings fund, having emergency savings set aside can actually help with your financial security and save you from going into unexpected debt that would be even more destructive to your financial wellbeing. The Thrivent survey revealed that 60% of people would be concerned if faced with an unexpected $500 expense.

While the amount within your emergency fund will depend on your financial situation, a general goal is to have enough to cover between three and six months of expenses.

Reassess your debt repayment options

Accounting for any debt payments is a crucial step to creating and maintaining a budget that can help you deal with inflation. Simply being aware of what you owe can be one of the best ways to take control of your debt. You can evaluate your options for making faster progress on your payments with high interest—and the money you would have spent on that interest can go toward other expenses that help offset inflation. Rather than trying to pay off all debt as quickly as possible, which can throw any budget off course, you should approach debt wisely by creating a realistic goal timeline, such as paying off a loan within nine months. From there, you can work toward your other debt repayment goals one at a time to make your money work harder for you.

A few options to consider:

  • Transfer your credit card debt to a card with a 0% APR for a promotional period to save on interest. The key to this strategy is trying to pay off the debt or paying it down as much as possible before that period ends, which can be easier to do when you're not paying any interest.
  • Reassess your student loans to see if you qualify for debt forgiveness under the Biden Administration's Student Loan Debt Relief Plan. You may also want to consider refinancing any remaining student loan debt, which can help you save money on interest if you qualify for a lower interest rate and consolidate a few sources of debt, making repayment more streamlined.

Reduce home energy costs

Your home's energy consumption can result in high monthly costs, especially as the seasons change. Fortunately, there are home projects you can tackle yourself that can help save some extra money on your utilities:

  • Insulate your home by sealing the windows and doors to prevent air leaks that can impact temperature.
  • Swap out your current incandescent light bulbs for energy-efficient ones to lower your electricity bill.
  • Hang out freshly-washed clothes to air dry in place of running the dryer.
  • Wrap your water heater with insulated materials to save on energy.

It's also possible to negotiate your utility bills (especially if you live in a state that supports energy choice), so don't be afraid to call up your utility providers to talk about lower rates.

Reconsider car insurance costs

Review your current car insurance policy to see if you can save any money on this recurring expense. It may be worthwhile to ask about discounts your current provider can offer or shop around for a new insurance company. You can also choose to raise your deductible to save on your monthly premium, but if you do this, it's a good idea to have some money set aside for a larger payment in case you ever need to file a claim.

Streamline your subscriptions

One easy way to free up room in your savings is to reevaluate any subscription or membership services you're paying for. From TV and movies to meal kits to gyms, you may be subscribing to something that you don't really need, that you can do without for a time and that's making an unnecessary dent in your budget. Take a hard look at what services you can cancel and unsubscribe from them. You can always resume them later if you miss them once you feel better about your financial situation.

Adjust grocery shopping habits

Grocery prices are among the necessary items that feel the largest impacts of inflation, so it can be a wise idea to reassess your regular shopping list to maximize savings. Consider the extra money you could keep in your pocket by swapping brand-name products for generic ones, planning meals around ingredients currently on sale, making bulk purchases and using coupons. Unlike entertainment subscriptions or dining out, groceries fall into the "need" spending category for expenses. This means while you can't leave them out of your budget, making small changes can add up to a big difference in your money saved over time.

Invest your savings

More than half of consumers (60%) from the Thrivent survey feel like inflation is getting in the way of their savings. If you find that you're not able to put as much money as you'd like toward savings right now, think about investing instead to give your saved-up dollars a better chance of growing. If you're unsure of how to invest your money, you may want to consider dollar-cost averaging. Dollar cost averaging does not ensure a profit, nor does it protect against losses in a declining market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels and varying economic periods.

Next steps

Reworking your financial life in order to cope with the strain of inflation can feel overwhelming. And while adjusting your budget can make it easier handle the financial effects of rising prices, you should also talk to a trusted professional about your finances. This person can help you discover any financial behavioral patterns that impact your budget, work with you to chart a clear path forward and help you stay accountable to your plan.

A Thrivent financial advisor can provide that support and act as a sounding board for your financial decisions. They can meet you where you're at—whether you're starting from scratch or building more advanced financial strategies to protect your budget and savings from inflation.