Maybe you’ve heard about inflation lately – or maybe you’ve just taken a look at used car prices. However, there is no denying that inflation is becoming a hot topic across the country.
But is all this concern about inflation justified? If so, what is the cause? And more importantly, what can the average consumer do about it?
What does inflation mean?
Inflation refers to the concept that the prices of goods and services increase every year. There are several causes of inflation, depending on the specific industry and sector. Usually annual inflation hovers between 1% and 3%, but the Covid-19 pandemic and other factors have seen inflation soar over the past year.
The Bureau of Labor Statistics monitors the index of consumer prices (CPI), which tracks the cost of goods and services and is often used as a barometer of inflation.
As of June 2021, the CPI has risen 5% over the past year, the largest annual increase since 2008. The high rate of inflation has hit consumers hard, especially given the fact that many are still recovering from job losses and the curfew.
Why inflation matters now
Usually the inflation rate doesn’t justify front pages. However, because the cost of some goods and services has increased significantly, many consumers are concerned.
For example, the cost of wood increased 300% from February 2020 to May 2021, which caused prices for new buildings and home renovation projects to rise. Data from the Bureau of Labor Statistics found that used car prices rose 30% between May 2020 and May 2021.
When interest rates plummeted during the pandemic, potential homebuyers began looking for the right home. This led to a sharp rise in property prices. Car rental prices have also risen as car rental companies struggle to afford new cars.
This is how you react to rising prices
If you don’t need to buy a car or house now, wait for prices to settle down. It is not clear how long this will take. So if your 2005 Honda Accord is on its last legs you may be forced to buy a car before prices normalize again. The good news is that cars in barter are now worth a lot more. If you are looking to sell a car, now may be the best time to maximize your profits.
“Live your life within your means,” said certified financial planner Christopher Flis from Resilient Asset Management. “If you can afford to pay the current price for a car because you need or want one and your budget supports it, that’s fine.”
Deciding whether or not to buy a home now is a little more difficult. Since a home is one of the most expensive – and important – financial decisions you will make, weigh the pros and cons before making a decision.
Flis said consumers can still buy a home, but they should make sure the monthly payment is within their budget. You shouldn’t consider owning a home as part of your investment strategy. It is almost impossible to predict property values, so you never know if prices in your area will continue to rise or suddenly fall.
If local home prices collapse, you could end up with your mortgage underwater. This means that the mortgage balance is greater than the value of the house. It is almost impossible to sell a home underwater because you have to pay the difference between the loan balance and the selling price.
Flis said he recently spoke to a couple who bought a $ 200,000 home in North Carolina four years ago. They recently sold it for $ 515,000.
“If you pay $ 515,000 in this North Carolina city, you run the risk of being underwater in the near future,” he said.
Before buying a home, consider how long you will be living in this area. Unless you plan to stay there for at least five years, don’t buy the house. If you have to sell it and find it is worth less than you owe, you will be stuck unless you can make the difference yourself.
Start a budget
If you haven’t started budgeting already, it may be time to start. Even if budgeting doesn’t address the systemic problem of inflation, it can help you mitigate the impact on your financial health. Keeping track of your expenses on a regular basis can help you identify areas of increasing costs so that you can divert money from other categories to address the discrepancy.
To create a budget, make a list of your basic spending categories. These can include:
- Utilities and Internet
- Debt payments like student loans, personal loans, and more
- Save and invest
- Charity and gifts
Then go through your bank and credit card accounts for the past three months to get an average of how much you are spending per month on each category. Enter the averages into the Mint app and the monthly total will be calculated.
Compare that to your net monthly salary, which is related to your after-tax income. You can find this information on your pay slip. If you are self-employed, a gig worker, or a contractor, use the average amount you earn per month as your base net income.
If the total expenditure exceeds the total income, you will have to make cuts in certain areas. First, try making big changes, like refinancing high-yield loans or downsizing to a cheaper apartment. These will affect your budget more than clipping coupons or switching to generic brands.
Next, start by tracking and categorizing your expenses a few times a month. If you find that you are overspending in a particular category, see where you can cut back.
Zina Kumok (134 posts)
Zina Kumok is a freelance writer who specializes in personal finance. As a former reporter, she has covered murder trials, the Final Four, and everything in between. It has been featured in Lifehacker, DailyWorth, and Time. Read how she paid off $ 28,000 in student loans at Conscious Coins in three years.