Inflation-Proof Your Finances: Avoid These 3 Costly Errors

It's more important than ever to get your spending right.

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Key points

• In a high inflation environment, things cost more and your money is worth less.
• Keeping the bulk of your money in cash means you are losing money.
• Pay off variable high-interest debt and reduce your spending to make your money go farther.

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The average American is now paying close to $4,100 more in necessities and gas this year. In April, the price of consumer goods was up 8.3% year over year, according to the Labor Department's most recent data. From gas prices to food costs, the dollar is not going as far as it used to. Here are three money mistakes to avoid during times of high inflation.

1. Don't keep your money in cash

The national average savings rate is currently 0.07%. With inflation at 8.3%, the real value of your money is actually decreasing by 8.23% every 12 months. Not only are bank accounts paying very little interest, but keeping the bulk of your money in cash means you are losing money. You should keep three to six months of your expenses in your emergency savings account, but anything above that could result in needlessly losing money to inflation.

Investing in stocks is one of the best ways to keep up with inflation. Stocks can be volatile, but over the long run the S&P 500 has outpaced inflation. The stock market is down close to 15% year-to-date due to economic conditions and the Fed hiking up interest rates. But dollar-cost averaging and investing consistently can help you meet your financial goals. 

The 10 best days in the stock market the past 20 years occurred after big declines such as the 2008 financial crisis and the onset of Covid. If you invested $10,000 in the S&P 500 on January 1, 2002, you would have $61,685 by Dec. 31, 2021. If you were to miss the best 10 days during this time period, you would have $28,260, over 50% less. In comparison, $10,000 sitting in a savings account averaging 0.15% a year would be just $10,152. The key is to build your investment portfolio based on your risk profile and investment objectives. 

2. Not paying off variable debt

To cool off inflation, the Fed raises interest rates to slow down demand. You should focus on paying off variable debt such as credit cards, lines of credit, and other debt which is directly impacted by higher interest rates. The average credit card interest rate is currently 16.59%, 44 basis points higher than this time last year. The interest rate for those with subprime credit ranges from 22% and above. 

The difference between a 15% APR and a 20% APR can be thousands of dollars in interest. Focus on paying off your high interest rate debt during times of high inflation. If you have a lot of debt, you can look at transferring your high interest debt to a lower APR, get a debt consolidation loan, or ask your credit card issuer to lower your interest rates. Continue to check your variable rates for the latest changes. 

3. Spending too much

When prices are rising, your money won't go as far. Keep a budget to reduce your spending. Certain categories have increased more than others, so you may need to update how you have budgeted per category. Gas prices are over 50% higher than 12 months ago, food 9.4%, used vehicles 22.7%, and apparel by 5.4%. 

When necessities begin to cost more, you should look at your spending to keep your costs low. Cancel unwanted subscriptions, eat out less often, and look at ways of saving gas. Cutting back on your spending can help offset higher costs. Until prices return to normal, your money is less valuable. Saving more can help better prepare you if high inflation continues to be a problem.