You might have heard that the economy is getting back on course and that inflation is going down. Does this mean you don’t need to save now? No! Saving isn’t something you do only on special occasions — it should be a regular habit that helps you achieve your financial goals. Here are a few key rules to follow to ensure effective savings, even during times of high inflation.
Automate Your Saving: The first rule of saving is to make sure your savings grow. One of the best ways to do this is to set up automatic transfers to your savings account. Consistently building your savings is key to preserving your purchasing power during times of inflation.
Samantha was a client who, for years, did not manage to save. She was making a decent salary but did not know where her money was going. I often heard her say she went on last-minute trips and shopping sprees. The missing link in Samantha’s financial plan was that she had only one bank account — a checking account. At the end of each month, if there was any money left in that account, she would just spend it. How can Samantha ensure that she saves? She can set up automatic contributions, such as money taken directly from her paycheck, to go into a separate savings account. Keeping your savings in a dedicated account and making automatic contributions can help ensure that the money you want to save is “out of sight, out of mind” to meet your financial goals.
Adjust Your Emergency Fund: Another strategy for saving is to increase your savings by at least 10% of your income during times of low inflation — especially your emergency fund contributions — to afford the same goods and services during times of high inflation.
When COVID-19 became a pandemic, a large segment of the population went from a two-salary household to a one-salary household, as one parent needed to homeschool the kids. Those families that had an emergency fund were often able to stick to the same budget, even with less income coming in. Those without an emergency fund sometimes had to file bankruptcy, move in with relatives or find other sources of income. I recommend that my clients have an emergency fund to accommodate at least six months of essential and fixed financial expenses.
Don’t Take on Debt: One strategy that is especially important during high inflationary times: Minimize your use of debt and maximize your debt repayments. Paying interest for outstanding loans or credit card debt in inflationary times is counterproductive because the interest rate keeps going up! When your credit card debt is not paid on time or exceeds more than 30% of your credit limit, it can also damage your credit score. The lower your credit score, the more you pay for loans and the less savings you will have when you decide to make your next large purchase, whether that be a car, a home or furniture.
Try not to use your credit card if you don’t have cash in your account to pay for the outstanding balance. Stick to having just two credit cards, and always pay your credit card bills on time. The extra money you have from not paying high interest rates can go to shoring up your emergency savings fund.
If you’re struggling to save, consider working with a CFP® professional to build a financial plan. Find your CFP® professional today.
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