6 Key Signs Inflation Has Permanently Messed Up Your Wallet
Written by
Cynthia Measom
Edited by
Melanie Grafil
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If you’re worried about how inflation might affect your finances, you’re wise to think ahead. Inflation isn’t just about rising prices–it’s also about lasting changes that can permanently impact your financial future.
For one, as the cost of living increases, your purchasing power decreases, making it harder to maintain your current lifestyle. Additionally, inflation can impact your savings and investments in unexpected and unpleasant ways. Understanding these effects and learning how to protect yourself are important for ensuring your financial health down the road.
Your Purchasing Power
Dennis Shirshikov, finance professor and head of growth at Summer, said that as prices rise, the value of money decreases, leading to reduced purchasing power.
“Over time, this can permanently affect your ability to afford goods and services,” he said.
How To Combat It
Shirshikov said you should invest in assets that outpace inflation.
“Stocks, real estate and commodities tend to provide returns that exceed inflation over the long term,” he explained. “For example, investing in a diversified stock portfolio can help maintain and grow purchasing power.”
Shirshikov also recommended adjusting your spending habits. “Regularly review and adjust your budget to account for rising costs,” he suggested. “This might involve cutting discretionary spending or finding more cost-effective alternatives.”
Fixed-Income Strain
Shirshikov said that people on fixed incomes, such as retirees, are particularly vulnerable.
“Their income does not increase with inflation, leading to a gradual decline in their standard of living,” he said.
How To Combat It
Shirshikov’s first suggestion is to invest in inflation-protected securities. “Instruments like Treasury Inflation-Protected Securities (TIPS) adjust their principal value based on inflation, providing a safeguard against rising prices,” he explained.
Another way to counteract fixed-income strain, according to Shirshikov, is to diversify income sources.
“Consider part-time work, freelancing or other income-generating activities to supplement fixed income,” he suggested. “Additionally, investment income from diversified portfolios can help mitigate the impact.”
Savings Devaluation
“Money kept in low-interest savings accounts loses value as inflation outpaces interest earnings,” said Shirshikov. “For instance, a savings account earning 1% interest when inflation is 3% results in a real loss of purchasing power each year.”
How To Combat It
“Look for high-yield savings accounts or certificates of deposit that offer better interest rates,” recommended Shirshikov. “Credit unions and online banks often provide more competitive rates.”
Shirshikov also recommended increasing your investment allocation.
“Shift more of your savings into investments that offer higher returns, such as mutual funds, ETFs or individual stocks,” he said. “Maintaining a balanced portfolio with a mix of assets can provide both growth and security.”
Inflation and the Effect on Market Volatility
“Inflation can lead to market volatility, impacting investments,” said Shirshikov. “Bonds, in particular, suffer as rising inflation erodes the fixed returns. Stocks may initially seem a better hedge, but high inflation can lead to economic instability and affect stock market performance.”
How To Combat It
Shirshikov recommends diversifying your portfolio. “A diversified investment portfolio can reduce risk. Include a mix of stocks, bonds, real estate and other assets to spread exposure,” he said.
He also said it’s important to regularly rebalance your portfolio.
“Periodically review and adjust your portfolio to ensure it aligns with your risk tolerance and financial goals, especially in response to inflationary trends,” he added.
Higher Interest Rates Impact Borrowing Costs
Gloria Garcia Cisneros, a wealth manager and CFP with LourdMurray said that higher interest rates impact the cost of borrowing money via personal loans, business loans, credit cards and mortgages.
How To Combat It
“Combat by keeping any low rates for loans that were previously locked in (like a mortgage) and attempting to avoid high interest rate debt like credit cards,” Cisneros suggested. “Ideally, there are emergency savings that can be tapped into if necessary for one-off unexpected expenses.”
Uncomfortable Cost of Living Increases
“These tend to be stressful times and avoidance may seem like your default, but this is when you want to be most in tune with your spending,” recommended Cisneros.
How To Combat It
Cisneros said to adjust your budget or spending plan accordingly.
“Review and check in on what expenses are necessary and not,” she said. “This can help identify where you can cut if numbers get tighter. This also allows you to spend on what matters to you most and reduce expenses on items you forgot or didn’t realize you were spending on.”
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