Inflation, a term that we’ve become accustomed to hearing, remains a persistent concern for many. Despite several months of cooling inflation, the Consumer Price Index (CPI) remains high at 5%, with key players in the interest rate game predicting further increases. Even after the inflationary cycle cools off, its effects are likely to be felt for years to come.
The impact of inflation is severe and has the potential to mar financial prospects, particularly when individuals struggle to keep up with rising prices. According to an October survey by life insurance company Allianz, 54% of people in the US stopped or reduced their retirement savings contributions due to inflation. Additionally, a February survey conducted by Bankrate found that 49% of consumers have less savings compared to a year ago, with 10% reporting having no savings at all.
The effects of inflation go beyond the immediate concerns of spending more money today for the same goods and services. Individuals who struggle to keep up with inflation risk losing long-term savings that could have grown through investment and compounding. Bankrate calculations show that a 25-year-old who stopped investing for a three-year period to deal with inflation would miss out on almost $200,000 in retirement savings by the time they were 70, had they been funneling $2,400 a year into their account at any other point.
In addition to losing savings, individuals may also give up their emergency fund to pay for rising costs, putting them in a delicate position where any unexpected expense could force them to take on debt or give up certain everyday necessities. Piling onto high-interest credit card debt is also a possibility, with household debt in the US rising nearly 8% between 2021 and 2022, according to a December survey by NerdWallet.
To avoid carrying the effects of inflation for years to come, Bankrate Analyst Sarah Foster recommends prioritizing saving and investing. Even if individuals have to scale back to deal with inflation, they should try not to stop contributions entirely and give their money a chance to keep up with inflation by investing their savings. Individuals may also consider transferring high-interest credit card debt onto a 0% interest card to avoid accruing more debt if they can’t afford to pay off the full amount. Additionally, staying informed on inflation and monitoring spending to know when inflation has eased up can be helpful in avoiding the long-term effects of inflation. In summary, individuals should always be prepared for uncertainty, even in times of economic peace, to mitigate the impact of inflation on their finances.
