Many people know that inflation can be a worrying phenomenon for investors and budget-conscious consumers. But, how does inflation directly affect your personal finances? Deepening your knowledge about how inflation affects money is helpful in any money management strategy.

Here’s a foundational guide to what long-term inflation means for the goods and services you use, your paycheck, savings, and overall finances. Once you have a better understanding of these details, you can make smarter decisions about how you want to spend, save, and grow your wealth.

You’ll spend more on goods and services

By definition, inflation means prices go up. Sometimes, inflation affects only certain industries or only certain corners of the economy. In other cases, the costs of goods and services go up across the board. This means the cost of living will become more expensive overall.

It’s important to plan for an across-the-board rise in your overall expenses to be sure you can afford to keep up with your expenses. One effective way to do this is making sure you have a budget in place. 

Additionally, you’ll want to have a deep understanding of essential versus flexible living costs. This can enable you to know which categories to prioritize in the event that you need to scale back.

Your paycheck won’t go as far as it used to

In many cases, inflation-adjusted wages aren’t keeping pace with rising living costs. In other words, even as workers get cost-of-living paycheck increases, inflation is still outpacing these pay rises. Overall, this means that you may not be able to afford what you could previously on your same paycheck.

As a result, you may need to pull back on your spending, especially in the case of discretionary expenditures, or expenses you can live without. It can be helpful to divide your common costs into need-to-haves versus want-to-haves, to gain a sense of how to lower your spending overall, while still being sure you can afford the essentials.

You may find it harder to save

Higher prices mean you’ll have to dedicate more of your earnings to be able to pay for the things you did pre-inflation. This generally leaves you with less money left over each month to put into savings. That can affect your retirement funds, education savings, nest egg, and more, which can have implications for the future.

This reality can be a tough pill to swallow, even for the most dedicated, ardent savers. However, inflation may drag on your savings, but it doesn’t have to stop it entirely. It can be helpful to set an adjusted goal each month that’s realistic, keeping in mind how inflation is affecting your spending on essentials. Even if you only save a fraction of what you did before prices started to rise, you’re still contributing to an overall goal.

It may be wise to hold off on larger purchases

Along with daily consumption goods, inflation can also edge up the price of large, one-time purchases, such as a home or car, as interest rates increase. People planning large purchases like these may find themselves deciding to delay their plans.

High-cost expenditures like a family vacation or a wedding also may be affected by rising prices as airline, hotel, or catering prices increase.

Even if you have a strong financial cushion for big-ticket expenditures, waiting until prices lower, if possible, may be prudent. Your designated savings may not stretch as far, keeping you from being able to afford the type or size of asset you wanted. Delaying much-anticipated plans until inflation cools may be difficult to do, but the choice can be a smart financial decision if you’re in a flexible situation.

You may be tempted to stop putting away money and investing amid inflation, but keeping up good financial habits — even as prices rise — is critical to setting yourself up for long-term success. Speaking with a financial professional who can work with you to plan changes to your budget and lifestyle amid inflation and set you up for future success can be a helpful step forward.

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