How Inflation Impacts Your Finances and What You Can Do About It
Inflation and Its Effect on Americans
2022 was a challenging year for many Americans due to the major issue of inflation. The rising prices pushed people into credit card debt, forcing them to dip into their savings just to make ends meet. However, there is some good news on the horizon: inflation has cooled down significantly in 2023. With annual inflation at 3.2% as measured by the consumer price index in July, compared to 8.5% in the same month last year, we are clearly in a much better situation.
Despite this positive trend, financial expert Suze Orman advises consumers to shift their focus away from tracking inflation levels and towards their own personal savings and finances. She believes that it’s more important to analyze one’s financial picture and make necessary changes or improvements.
Why Tracking Inflation Levels May Not Be Effective
Orman argues that while keeping tabs on the consumer price index can give you a general idea of living costs, it’s not a productive use of the average consumer’s time. Instead, she suggests looking at your own financial situation and evaluating if any changes are needed.
Orman exemplifies this by stating, “It doesn’t matter how much the eggs cost or how much gas prices are if you don’t have the money to pay for them.” She emphasizes that the focus should be on personal financial stability rather than general inflation levels. For instance, fretting over a few cents difference in gas prices may seem insignificant, but if you’re struggling to afford even the lower price, it’s a sign that your overall financial situation needs attention.
Taking Control of Your Finances
If you find yourself having trouble covering basic living costs like housing, food, utilities, and transportation, it’s time to review your spending habits and make necessary adjustments. Consider these tips to improve your finances:
- Evaluate your housing situation: If your rent is excessively high, it might be worthwhile to look for a more affordable home. While moving can come with initial costs, such as a $500 expense, the long-term savings of $400 per month on rent can make it a worthwhile investment.
- Downgrade your vehicle: If you’re burdened with a hefty monthly car payment, consider trading it in for a more affordable option. By reducing your car expenses, you can free up extra funds for other essential needs.
- Identify areas to cut back: Review your leisure expenses and see where you can make cuts. It might mean reducing dining out or entertainment expenditures, but every small adjustment can contribute to greater financial stability.
Orman emphasizes, however, that not everyone needs to drastically cut their spending if they are generally doing well financially and only occasionally face a rough month. The focus is primarily on those who struggle month after month to cover basic expenses. For individuals in this situation, it’s crucial to rethink their spending habits and build up cash reserves, especially for necessities like gas and groceries.
The Importance of an Emergency Fund
In addition to reevaluating your expenses, it’s essential to establish an emergency fund, even if you start with a small amount. Having just $50 or $100 in the bank for unexpected bills is better than having no savings at all. One effective way to build savings is to automate the process. By setting up an automatic transfer from your bank account to your savings after each paycheck, you’re less likely to forget or neglect saving money.
Orman emphasizes that even if you can only contribute a minimal amount per paycheck, starting somewhere is key. The idea is to develop a habit of saving and gradually increase the amount as your financial situation improves.
It’s All About Personal Finance
While the overall trend of inflation cooling down may have positive implications, Orman warns against fixating on this factor alone. Celebrating lower inflation rates should not overshadow the importance of examining and improving our personal finances. It’s crucial to prioritize financial stability and make any necessary changes to our spending and saving habits as soon as possible.
Ultimately, Orman’s underlying message is clear: keeping track of inflation levels may be informative, but it’s more important to focus on your own financial situation and take proactive measures to secure your financial future.
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Remember, the key to financial stability lies in assessing your own financial situation, making necessary adjustments, and prioritizing personal savings. While keeping an eye on inflation trends might give you a broader perspective on living costs, the focus should always be on your own journey to financial well-being.
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Inflation has been a major issue in 2022, which has pushed many Americans to do so credit card debt and forced them to raid their savings to stay afloat. But inflation has cooled nicely in 2023.
Last July, annual inflation was measured at 3.2%, according to the consumer price index. Compare that to July 2022, when annual inflation was 8.5%, and we are clearly in a much better situation.
But financial guru Suze Orman insists that consumers shouldn’t waste time focusing on how inflation is measured. Instead, she says, consumers should focus on their own personal interests savings and finances.
It’s not always worth looking at the big picture
Keeping tabs on the consumer price index can give you an idea of what living costs look like across the board. But Orman insists that measuring inflation levels isn’t really a good use of the typical consumer’s time. Instead, he says, consumers should look at their financial picture and see if changes or improvements are needed.
As Orman says, “It doesn’t matter how much the eggs cost or how much a liter contains gas costs if you don’t have the money to pay them.”
And he’s right. You may prefer to pay $3.29 for a gallon of gas instead of $3.59. But if you can’t even afford $3.29, you’re not in a good position. And this is something to focus on rather than general inflation levels.
How to improve your finances
If you’re having trouble covering basic living costs like housing, food, utilities and transportation, then it may be time to review your spending habits. That might mean moving to a less expensive home or trading a hefty monthly car payment for a smaller one. It might also mean cutting back on some leisure expenses.
These are all difficult things to do. And in some cases, there may be a cost. You may have to spend $500 to move to a less expensive home. But if it saves you $400 a month in rent for the next year, it might be worth it.
Now, to be clear, you don’t have to go on a spending-cutting spree if you’re generally doing well financially and occasionally have a rough month when unplanned bills arrive. But if you’re having trouble covering basic expenses month after month, it may be time to make some changes, no matter how difficult they are to implement.
As Orman says, “You can spend money if you have money to spend…if you have an emergency savings account and don’t have any credit card debt.” But people living paycheck to paycheck should aim to rethink their spending and build up cash reserves, especially those who have to worry about filling gas tanks and buying groceries for the week.
In addition to reevaluating your expenses, it’s a good idea to build some sort of emergency fund, even if that means starting with a very small one. You’re better off having $50 or $100 in the bank for an unplanned bill than no money at all.
A good way to build savings is to automate the process by having some money leave yoursBank account after every paycheck and get your savings. If you set this to happen automatically, it is less likely to end Not move money into savings.
And again, if you can only spend $5 per paycheck for savings purposes, so be it. The key is to start somewhere.
Focus on you
Inflation could cool. And that can have a personal impact, because lower inflation can mean cheaper gas, groceries and electricity.
But ultimately, Orman believes it’s pretty pointless for the average consumer to track inflation. And he also doesn’t want to see too many people getting caught up in celebrating cooling inflation when their personal financial situations are dire.
So while it’s fine to be happy with the state of inflation compared to a year ago, it’s even more important to examine your finances. And if you need to make changes to how you spend and save, do your best to implement them as soon as possible.
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