Inflation is up 8.3% year over year, according to the latest data from the U.S. Bureau of Labor Statistics. Many factors — including supply chain disruptions, multi-trillion-dollar government spending packages, the war in Ukraine and economic fallout from the COVID-19 pandemic — have contributed to higher prices at the gas pumps, on the grocery shelves and elsewhere, as compared to the same time last year.
Most American households are feeling the pinch. But you can take proactive measures to improve your financial picture during these uncertain economic times. Consider the following 10 practical suggestions:
1. Follow an evolving budget. If your monthly cash outflows exceed your inflows, a budget can help you live within your means. Break down your budget into the main categories for incoming funds and outgoing expenses. You’ll quickly see if you’ve sprung a leak that needs patching. This shouldn’t be a one-time exercise. You’ll need to continuously fine-tune your budget as circumstances change. Also, don’t forget to set aside a “rainy day” fund for unexpected costs, such as a broken dishwasher or car repairs.
2. Spend less on groceries. An easy way to save money is to curb impulse buying at the grocery store. Do you really need all those perishable items that may spoil or products that will likely remain in your cupboard until you eventually throw them out? Shop with a list and try not to deviate too much. You might even save money overall by shopping online, even with delivery fees.
Also take advantage of coupons, customer reward programs and other incentives that make sense for your household. For example, if your local grocery store has a big sale on ground turkey this week, you could plan to have turkey burgers on Monday night and turkey spaghetti later in the week — then you could freeze a pound to use in two weeks. Buying based on weekly sales flyers, especially for meats, fruits and other higher-priced items, can dramatically lower your weekly food bill.
3. Pay down or consolidate debt. People with excessive credit card debt may fall into a rut that’s hard to escape, especially when the Federal Reserve is increasing rates. After the Fed’s third consecutive 0.75% rate increase in September, the Federal funds rate is at its highest level since early 2008. This is the rate that commercial banks lend reserve balances to each other overnight on an uncollateralized basis. Every time the so-called “Fed funds rate” goes up, the prime lending rate goes up — along with the annual percentage rate (APR) on your credit cards.
If your budget shows that a healthy chunk of your monthly cash outflows are credit card payments, focus on whittling down what you owe. If possible, consolidate debts with a single source that offers a reasonable rate. Depending on the size of your outstanding balance, it could take months or even years to chip away at your debt — but a consistent, disciplined approach will pay off over the long run.
4. Scale back on luxuries. The current economic outlook warrants cuts in discretionary items. For instance, if you had planned to take multiple vacations within the next year, consider skipping one of the trips. Along the same lines, if you frequently eat dinners out at expensive restaurants, go out for lunch instead, which is generally cheaper. And do you really need that $7 cappuccino every morning?
5. Lower your tax bill. Paying taxes to Uncle Sam is a necessary evil, but you might owe less with some astute year-end tax planning. For example, you could contribute pre-tax dollars to a tax-deferred retirement plan (up to the applicable limit), which lowers your taxable income. Or you could reap a sizable tax credit for making energy-efficient home improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems.
Another option: If you’re short on cash, you could simply gather household items that you no longer need and donate them to charity. Generally, itemizers can deduct the fair market value of the donated goods. Review your situation with your professional tax advisor.
6. Shop around. If you’re like most people, you’re probably loyal to certain brands, products and stores. In fact, you may purchase certain items on a regular basis without even thinking about how much they cost. Consider lower-cost alternatives. In many cases, you can spend less without compromising quality. Many grocery stores offer generic or private-label products next to branded products on the shelves. Unbranded products usually are manufactured by smaller companies without large marketing budgets or by the same companies that make branded products.
7. Negotiate prices. Most people don’t pay sticker price for a new vehicle at the showroom, so why accept the stated price for other goods and services? You may be surprised to find that some vendors are willing to trim their fees to keep your business. Examples include cellphone plans, cable and internet packages, landscaping, and home repairs. It doesn’t hurt to ask — the worst they can do is say no.
8. Drive smarter. Gas prices have dropped slightly from their mid-year highs in most parts of the country, but it still costs a pretty penny to fill your tank. Simple but effective ways to reduce gas consumption include:
- Combining errands to reduce the number of trips,
- Avoiding trips during peak traffic times,
- Minimizing idle time by shutting off your engine when waiting,
- Checking tire pressure regularly,
- Limiting air conditioning usage, and
- Walking or bike riding whenever possible.
Also consider using GPS apps to help you find the fastest route, along with fuel apps to help you find the cheapest gas in your area.
9. Earn more money. Lowering expenses is only one side of the equation. You can also help stem the tide of rising prices by generating more income. The simplest way to do this is to ask for a pay raise or work a little overtime at your job. Alternatively, it might be time to update your resume and hunt for a new job that pays more or provides more generous benefits. Or you might find a “side hustle” that can supplement wages from full-time employment — just be sure not to violate any noncompete agreements you’ve signed for your day job.
10. Consider rental options. If you have a vacation home or even unused space in your primary residence — for example, a basement apartment that your kids occupied in their teen years — you could lease it to bring in some extra cash. Likewise, people who live in areas with seasonal events, such as a golf tournaments or music festivals, could temporarily relocate and rent their homes to attendees at a premium. This income is tax-free if you rent for less than two weeks per year (but you can’t deduct rental expenses either).
Inflation is expected to continue at least through the end of 2022. The sooner you can get your finances in check, the better prepared you’ll be to weather whatever the economy has in store. Contact your financial advisor for other creative solutions that could work for your situation.