Inflation is a rising price level. The main cause of inflation in our economy today is too much money circulating too quickly, causing price increases throughout the economy. In other words, for inflation to be at its highest point, it needs to have a higher than the normal velocity of circulation of money into different parts of the economy. This includes goods and services consumed by households, government spending, and business spending on items like machinery, equipment, and raw materials.
We know that an increase in overall economic activity will lead us to have more output and jobs. However, we don’t see those things that support those activities, such as tools, machines, or materials. These are called inputs to production, and when they rise in cost, so do prices. Here are steps to combat high prices:
1. Track your expenses
If you’re paying too much for something, compare the expense against other costs and determine where the excess amount was spent. Are there cheaper alternatives? Is this item worth the extra expense? Think about the long term and how that purchase will affect your lifestyle. Sometimes, it’s important to get exactly what you want, but you can find a better deal without paying more than necessary for something with a little research.
2. Invest your savings
When saving for retirement, it might seem like this money won’t grow very much, but it does compound on itself over time. So why not invest while using returns to investments to hedge against inflation instead of just putting them under your mattress?
If you put $100 away every month, you’ll have $19,000 after 20 years. That’s the same as having earned six percent interest annually which means you could easily retire earlier if you wanted to. With that kind of return on investment, you’ll make up the difference between the 3% return needed to maintain your current standard of living (remember, your income has to increase) and the 7-8% annual rate of return you would need to save enough money to live off.
Not only that, but you’re building a nest egg of money that eventually pays for itself. There is no reason you should ever spend more than you earn! Saving is one of the key ways to protect yourself from the inflationary cycle.
3. Don’t let your good money chase the bad money
The phrase “bad money chasing good” comes from economics. It describes a situation where people spend their money because they think it’s better than they already have. For example, if you borrow $1000 to buy a house, you will feel pressured to replace that money soon. So you go to your friends and family members and borrow another $1000, even though you probably don’t need to. Inflation happens because the supply of money grows larger than the demand for goods and services. By borrowing money to pay for something, you are making it harder than otherwise for others who want to buy that product to acquire it.
4. Understand taxes
When it comes down to taxes, you must understand how they work before taking advantage of them. Taxes play an important role in keeping inflation under control. For example, capital gains tax can either raise or lower the inflation rate, depending on which one has been implemented recently and how old the stock is. So, learn about taxes early, and you’ll know what you need to do accordingly. Learn about the different types of taxes and what each one accomplishes.
5. Save before treating yourself
Saving can help combat high prices through numerous methods. First of all, you can use it to pay off debt.
The second way you can use it to combat high prices is by purchasing insurance. Insurance helps reduce expenses when something goes wrong, such as health-related issues.
Thirdly, investing gives you something tangible back. No matter how well you did today, the market could tank tomorrow, wiping out any advances. But investing can provide benefits beyond finances — it promotes personal growth.
Finally, the last method that saves you from high prices is avoiding consumption entirely. A great way to avoid spending is to shop only during sales.
6. Create a budget
Budgeting can help combat inflation by setting priorities for your life. Before you begin, identify your greatest priorities by writing them down; you may be surprised by what shows up on top. Now, determine whether those needs are necessities or luxuries by classifying your expenses into essential expenditures and nonessential costs.
Essential expenditures are necessary living costs, while nonessential costs include eating out, going shopping, or buying entertainment. Once you’ve figured out your priorities, create a balanced monthly budget based on these priorities. Include your income towards your essentials first. You may be able to cut out certain unnecessary expenses to fund other priorities.
