[2023] 6 Ways I Beat Inflation: It Starts With Preparation
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Inflation probably has been the most hated out term of the 2020s, outside of COVID. And for good reason. It has wreaked havoc on peoples' purchasing power worldwide, thanks to the pandemic, broken supply chains, and too much stimulus.
But with enough advance warning, it is possible to neutralize the impact that inflation has on you. In fact, I came up with a list of strategies to implement a couple years back.
Here is how I prepared for and beat inflation, and how you can too next time.
What is inflation?
Inflation is the general increase in prices of items and services as time goes on. As inflation occurs, a currency, like the United States Dollar, for example, naturally loses purchasing power. Said another way, inflation leads to a higher cost of living.
You may have heard the mantra that a dollar today is worth more than a dollar tomorrow. The reason that this is true is a demonstration of inflation at work.
Some level of inflation is normal in an economy. In a healthy economic cycle, workers earning raises have more discretionary income to spend. This leads to an increase in demand for goods and services, which can then naturally support a higher price point.
Generally, the United States Federal Reserve strives to make monetary policy that supports a long-term inflation rate of about 2%.
What causes inflation?
There are a few main causes of inflation within a society, including:
A normal period of economic growth: As I alluded to, positive economic activity can be a precursor for some level of price increases within a society. As individuals find themselves with increased purchasing power, competition for limited goods and services tends to increase.
Federal Reserve monetary policy: Interest rate and monetary supply policy decisions made by central banks also play a role in managing inflation rates within an economy. Over the past eighteen months, for example, the United States Federal Reserve has repeatedly increased interest rates in an attempt to slow the economy down and put downward pressure on inflation.
Worker pay increases: Particularly in times when inflation is already high, worker pay increases tend to perpetuate the harsh cycle of inflation. Increasing worker purchasing power, even after an inflation induced decline, can continue the cycle, even though they are a natural reaction.
What are the dangers of inflation?
If left unchecked, inflation can be very dangerous, particularly for lower income workers in a society.
1. Reduced purchasing power
The most obvious example, of course, it the reduced purchasing power that results.
When you're used to paying $100 for groceries each time you go to the store, only to start spending $120 per week instead, this extra $20 has to come from somewhere. At first, it will likely come from your travel and entertainment budget, which is mentally difficult, but economically viable.
But if things get worse, you'll likely be forced to make some more difficult and painful decisions about where to spend and save your money.
2. Impact on investments and savings
Inflation can also cause trouble for your investments and cash savings, particularly short-term ones. Money saved in traditional checking accounts or invested in United States government bonds could lead to you to earn returns well under the rate of inflation, which could cause a further loss of purchasing power.
By and large, inflation can discourage saving for the future, which is also risky.
One option for your nonequity based savings and investments is to consider a high-yield savings account. And while it is unlikely that you'll find a rate greater than inflation, you will find rates higher than those offered in most checking or savings accounts.
United States Treasury I Bonds can be another option for some, but they typically require a $10,000 minimum investment to take advantage.
3. Further divide between the rich and poor
Unfortunately, periods of high inflation also tend to increase the gap between the rich and poor. Depending on the performance of equity markets during this period of economic turmoil, it is possible that higher-income people may actually benefit if assets like home prices and stocks increase.
Beating inflation: 6 tips
Once I realized that prices were going to continue rising and that inflation was not transitory like originally thought, I started brainstorming ways in which I could beat inflation. And while my purchasing power still declined somewhat, I ended up better off than many Americans did.
Without further ado, I beat inflation by:
Shopping at cheaper grocery stores
Switching electrical service providers
Investing more for retirement
Revisiting my subscriptions
Buying staples/toiletries in advance
Charging (responsibly) on credit cards
1. I shopped at cheaper grocery stores
My wife and I had been shopping at Whole Foods for a while before the price increases started. But as inflation began to take old, we started to get priced out of shopping there. Sure, we could technically still afford it, but I didn't want to have to give up weekend getaways or other travel in order to do so.
So, my wife and I made a trek to our local Aldi. Sure, the shopping experience is not the same and there are hardly any employees in the store, but so what? We found they still had a good selection of organic products for those that are interested, and the prices are so much lower.
2. I switched electrical service providers
Late last year, around the holidays, our electric company nearly doubled their electricity rates on a kWh basis, which led to a significant increase in our monthly electric bills. They did keep the delivery charges the same, so my bill didn't exact double, but it increased by about 30-40%, well over $120 per month.
Luckily, through a program in my state called EnergizeCT, offered alternate suppliers to choose from, each at a different kWh rate. I chose another provider and was able to lock into these lower rates for 18 months, which was a huge relief and saved us $120 or so per month.
There is a potential downside that you should be aware of in the event that your state offers a similar program. You should be aware that companies tend to hike rates sharply following the expiration of the rate lock, so you'll want to be well aware of your term period and switch again at that point should you need to.
3. I invested more for retirement
Since my cash savings were causing me to lose purchasing power, I made a decision to invest more in stocks, mutual funds, and ETFs for my retirement. And while this is not investment advice, my logic was to do so for two reasons:
The declining purchasing power I just mentioned
The stock market was in a bull market, making valuations more attractive than usual for long-term investing
This approach may not make sense for you if you don't have a fully funded emergency fund or if you are already living paycheck to paycheck. But if you have enough short-term cash to weather the storm, and potentially a recession, periods of high inflation can be a great opportunity to catch up on retirement savings.
You have to be able to afford to do so, though.
4. I revisited my subscriptions
Many times, it isn't large expenses that destroy budgets, but a compilation of little things that add up more quickly than you'd think.
Periods of inflation can be the perfect time for you to review all of these little expenses, subscriptions included. In just thirty minutes last month, my wife and I were able to cut an additional $150 in monthly expenses.
Among our cuts were:
A cable box for our bedroom television
A premium SEO service I wasn't really using as much for my work here
A Winc wine subscription
The key is not to sacrifice your quality of life, but rather to cut those things that you barely use or leverage anyway. For instance, we had not watched cable in bed in months, and we were accumulating wine bottles in our dining room that we were not even drinking.
5. I bought staples and toiletries
Another thing I did was to buy as many staples and toiletries as I could use whenever I saw good sales at retailers like Target, Walmart, and grocery chains.
Granted, this didn't save me a ton of money, but even an extra dollar here and there can make a difference. It also opened up some additional cash flow to spend on other things as prices continued to rise.
Good items to keep on hand if you have the money and storage room to do so include:
Toothpaste
Deodorant
Pasta
Rice
Beans
6. I maximized credit card rewards
Credit cards are a controversial topic in the personal finance world. But as inflation picked up, I actually began to charge more of my purchases, responsibly of course, in order to rack up as much cashback as possible.
One of my cards offers a flat 2% cash back on all of my purchases, so I mentally approached this as a 2% discount. I did make multiple payments per month to keep my debt-to-income ratio as low as possible.
How to prepare for inflation
Unfortunately, even with the rate of inflation coming down, it is likely that we will once again face it in the future. The best time to start preparing for inflation is now.
Luckily, I have six tips for you to help fight inflation next time.
1. Finish building an emergency fund
One of the greatest inflation fighting tools at your disposal is extra savings to weather the storm. And while you don't really ever want to use your emergency fund, it is nice to have the option should the prices of goods and services rise rapidly, just as they have in the past couple of years.
2. Pay down debt now
It can be a good idea to pay down as much debt as possible, particularly if you have any adjustable-rate debt. Adjustable-rate rate debt can leave you paying more if interest rates rise to combat inflation, which is common.
This means that your monthly payments would increase at the same time you are likely to have less discretionary income, a potentially dangerous combination.
There may be other times, however, when holding debt may actually be advantageous.
3. Assure your investments are diversified
Every economic cycle is different. There are times when different types of assets tend to outperform others. Periods of inflation are no different and since it can strike relatively quickly, it is important to maintain a well-diversified portfolio.
You may even be able to add TIPS to your portfolio - Treasury Inflation-Protected Securities.
Always remember to consult with an investment professional if you need to, though.
Conclusion
Inflation stinks. It causes financial stress and potential headaches for even the most responsible savers, to no fault of your own. But with some advanced preparation and know-how, you will be able to beat inflation the next time it emerges!
Did you beat inflation? Tell me in the comments below about any other strategies you used to do so!
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