In this Tuesday, June 15, 2021 photograph, beef is displayed in the meat department at Lambert’s Rainbow Market, in Westwood, Mass. The rise in consumer prices, or inflation, is a slow erosion of your money over time. And supply chain issues are a part of the inflation equation too. How can you protect yourself? Small financial moves can make a difference in helping to preserve your spending power. (AP Photo/Charles Krupa)
Inflation — the rise in consumer prices — is a slow erosion of your money over time. Before 2021, the United States hadn’t seen annual core inflation much above 3% for the better part of 25 years, says Michael Ashton, managing principal of Enduring Investments, a consulting and investing firm in Morristown, New Jersey.
So the 7.5% spike seen over the past year in the costs of fuel, used vehicles, groceries and just about everything else is the kind of sudden and systemic rise that can give a jolt to most peoples’ everyday spending.
Ashton also says that the COVID-19 pandemic stimulus checks and tax relief, combined with the reopening of the economy, fed consumer demand but didn’t replace product inventories. The result: shortages that lead to higher prices.
“Having supply chain difficulties is part of what inflation looks like,” Ashton says.
With inflation chipping away at your spending power, how can you protect yourself?
EXAMINE YOUR SPENDING
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— Trim discretionary spending, voluntary spending in categories like entertainment or travel, by just 5%. This is one of those incremental changes that isn’t that difficult to do and goes directly to your personal bottom line.
— Don’t delay a major purchase; prices will likely rise.
— Shop strategically. Buy more generic brand products and prescriptions. Save on necessary expenses by using coupons and store loyalty programs. Use membership cards (like Walmart+ and others) to pay 5 cents less per gallon for gasoline.
LOOK FOR SAVINGS
— Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). Many banks are waiving such fees and credit cards often have fee-free options.
— Renegotiate your cable, streaming or cell phone bill for any possible savings.
“I can say from my own personal experience – it’s amazing how easy this is,” Ashton notes. He says that every time he would call his cell phone provider, it would offer him a plan that was far better than his current one. “And it doesn’t happen unless you call,” Ashton adds.
He now makes a habit of calling once a year and asking, “What’s the best plan you have and should I be on that?”
— Reduce the number of subscriptions you have, even if by just one.
“You should do an audit of those from time to time because sometimes they sneak in a price increase, and it just shows up on your credit card,” Ashton says.
TRY TO BRING MORE MONEY IN
— Search for financial institutions that pay higher interest rates than you are earning now (if you are earning anything at all). Online banks and credit unions often offer high-yield savings accounts that sweeten returns, especially as interest rates rise.
— Perhaps the most powerful idea of all: Ask for a raise. If you haven’t received an increase in salary in a few years, you’ve likely experienced what amounts to a pay cut because of inflation, Ashton says.
THE INFLATION-MATCHING SAVINGS ACCOUNT
Another inflation-fighting idea: Series I savings bonds. They were created specifically to protect consumers’ purchasing power against inflation, says Zvi Bodie, professor emeritus in finance at Boston University. Bodie holds a doctorate in economics from the Massachusetts Institute of Technology and has become an avid proponent of I bonds.
I bonds rates are keyed to the rate of inflation, which lately has been over 7%, he notes. They are a perfect safe haven for near-term savings. And not a bad addition to your long-term nest egg, too.
A minimum investment i n I bonds through TreasuryDirect.gov is only $25, and an individual can put up to $10,000 annually into the savings bonds with electronic purchases. The bonds pay fixed interest plus the inflation rate, adjusted twice per year.
You can withdraw your savings without penalty after one year, but if you cash them in before five years, you’ll lose the last three months’ worth of interest.
“So what you get is essentially a savings account that can’t go down, and that’s going to go up with inflation,” Bodie adds. “Do I need to say more?”
INFLATION IS NOT THE SAME FOR EVERYONE
Inflation hit a 7.5% national average in January, but that’s not likely to be your inflation rate, says Ashton.
You may consume different items than the average person and you may not live in an average place, so your particular rate of inflation quite likely varies from the average, according to Ashton.
So, rather than agonizing over a single number as a spending power loss to recoup, use the small money moves above to improve your financial position slowly but surely.
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How saving when you’re young impacts your overall wealth
How saving when you’re young impacts your overall wealth
Half of American adults started 2022 with a desire to boost their savings. That admirable intention could prove easier for those who developed good savings habits at a young age.
After all, it’s possible kids who get used to regularly depositing some allowance funds in their piggy bank won’t think twice about setting money aside when higher wages and expenses enter the picture later in life. There’s even a significant bonus for young savers: Compound interest, which is the interest earned on interest.
To demonstrate how people can benefit from this mathematical superpower, GoHenry calculated how starting to save as a kid can impact your wealth by calculating how much money one can make if they started saving $1 a day at the age of 5.
This calculation was made by taking the premise that someone would deposit $365 at the end of a year into an investment account, and this money would compound annually at a market rate of 8%. The story shows the example of how much one would save if they started saving and depositing money at the age of 5, and how much that money increases by the ages of 6, 7, 10, 12, 16, 18, 25, 50, and 100.
Notably, minors can’t open their own savings accounts, but their parents or other adults can open joint or custodial accounts for them.
If you start saving at the age of 5
– End-of-year amount deposited: $365.00
– Amount returned: $0.00
– Total end-of-year wealth: $365.00
Abstract concepts like money and the power of compounding are hard for kids to comprehend at this age. Nevertheless, children are typically ready to develop skills that the Consumer Financial Protection Bureau says can build “a foundation for behaviors that support financial well-being,” including saving for the future. These skills include persisting through hard tasks and learning to wait for things they want.
The abilities to control impulses and plan ahead are also important, the bureau notes. Playing “pretend” and games like Simon Says and Red Light, Green Light can help kids build these and other critical skills while having fun.
In addition, encouraging kids to put coins into a glass jar can make the idea of money—and growing it—more concrete and exciting as savers develop their counting skills.
By age 6 (1 year of savings)
– End-of-year amount deposited: $730.00
– Amount returned: $29.20
– Total end-of-year wealth: $759.20
This is a great age to introduce allowances, which can be powerful tools to teach young kids about earning, saving, and spending. A 2019 study found kids in the U.S. were receiving an average of $30 a week in allowance, but an important lesson wasn’t sticking: Parents said their children were primarily spending the money to buy things. To help kids better understand savings, parents can encourage them to pick small savings goals and track their progress on a chart filled with colorful visuals.
Parents could go a step further by “matching” their childrens’ savings, like adding 10 cents to the piggy bank for every dollar they save. It’s a benefit children will hopefully recognize and appreciate one day if a future employer offers a similar incentive in the form of a 401(k) retirement savings match.
By age 7 (2 years of savings)
– End-of-year amount deposited: $1,095.00
– Amount returned: $89.94
– Total end-of-year wealth: $1,184.94
Most children at this age have gained a good sense of days, weeks, months, and sometimes even years. That growing understanding of time is important to fully appreciate the idea of saving money “for a later date.” In addition, many kids have developed several basic concepts relating to future finance behaviors. These include counting, understanding that coins have different values, and the idea that money can be exchanged for goods.
Many of these kids are also becoming independent readers. Filling their bookshelves with age-appropriate books about money introduces additional learning opportunities.
By age 10 (5 years of savings)
– End-of-year amount deposited: $2,190.00
– Amount returned: $487.61
– Total end-of-year wealth: $2,677.61
Kids in the fourth and fifth grades are ready to tackle key personal financial topics. These include understanding interest, why it’s important to save for emergencies, and how to develop ways to set short-term and long-term goals for saving, according to the FDIC.
These young smarties can also better understand the benefits of saving money in a bank versus at home. If parents haven’t already opened an interest-bearing savings account (or investment account) for a child, it’s a great time to do so. The best options offer a good interest rate that doesn’t require monthly fees or minimum balance requirements and have online tools that let tech-savvy savers monitor their growing balances.
By age 12 (7 years of savings)
– End-of-year amount deposited: $2,920.00
– Amount returned: $962.37
– Total end-of-year wealth: $3,882.37
Tweens are typically able to understand the math behind concepts like compound interest, not just the theory. They’re also able to plan ahead and save for things they want. That’s a timely skill as many are old enough to start babysitting, mowing yards, or finding other ways to earn larger sums of cash.
While they may be learning about personal finance at school, many youths are also looking for guidance at home. Half of surveyed kids between ages 8 and 14 said they want their parents to talk to them about how to save money.
By age 16 (11 years of savings)
– End-of-year amount deposited: $4,380.00
– Amount returned: $2,546.65
– Total end-of-year wealth: $6,926.65
Federal laws don’t restrict the number of hours a 16-year-old can work (though state laws may differ). That means that turning sweet 16 presents an opportunity to build up an impressive amount of savings, especially in the summer and when companies are desperate for workers amid labor shortages.
Parents may choose to open a checking account for their working teens to ramp up money management skills and make it easier for their young wage earners to pay their first bills.
Those expenses could be steep if new drivers are responsible for car-related costs during a time of rising inflation. For example, the average monthly payment for used vehicles was $520 in the last quarter of 2021. Likewise, in February 2022, the average car insurance cost was about $138 per month, though it could be even higher for young drivers, who typically pay the highest premiums.
By age 18 (13 years of savings)
– End-of-year amount deposited: $5,110.00
– Amount returned: $3,728.45
– Total end-of-year wealth: $8,838.45
Cash is always a popular graduation gift, and it’s surely welcomed by high-school seniors who are embarking on the transition into a full-time job or the next level of schooling. Some kids who have custodial savings accounts created as UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) accounts will finally gain control of them when they turn 18. Others will need to wait until they are 21 or even older.
This is a time for parents to help increasingly independent kids understand not only how to budget successfully, but also how to save and invest for short- and long-term goals. If teens are taking out college loans, they need to gain an honest understanding of the impact that graduating with student debt will have on their personal finances. The average public university student borrows $30,030 in pursuit of a bachelor’s degree, and that sum will likely take quite a while to pay down.
By age 100 (95 years of savings)
– End-of-year amount deposited: $35,040.00
– Amount returned: $7,337,459.00
– Total end-of-year wealth: $7,372,499.00
There were 97,000 centenarians in the U.S. in February 2021, and that number could increase over time. Life expectancy, or the number of years a person is expected to live, has generally been on the rise in the country since 1980.
Though reaching a three-digit birthday is a remarkable achievement, it can also be scary from a financial perspective. Forty-nine percent of Americans fear they will outlive their savings. It’s a reasonable worry given that Social Security replaces only about 40% of a worker’s pre-retirement income on average.
Fortunately, dutifully saving $1 a day for more than nine decades—and having the money compound annually at a market rate of 8%—could make someone a multi-millionaire by the time they gather around their cake with 100 candles to blow out, plus one to grow on.
This story originally appeared on GoHenry and was produced and distributed in partnership with Stacker Studio.
This article was provided to The Associated Press by the personal finance website NerdWallet. Hal M. Bundrick is a writer at NerdWallet. Email: [email protected]. Twitter: @halmbundrick.
NerdWallet: Discretionary Expenses: The Extras, Not Essentials https://bit.ly/nerdwallet-discretionary-expenses
TreasuryDirect: Series I Savings Bonds https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm