The Inflation Monster

Let's take a moment and identify how inflation is calculated. The Consumer Price Index (there are two) provides an estimation (based more on people who live in big cities than rural) on how much inflation is rising in the economy from one period to the next. Once that data is identified and disseminated, governments and individuals start to react. Actually, they have already reacted. Let's take a look.

The truth is, you and me respond to inflation everyday as we buy groceries, fill up the tank, dine out, pay for housing and utilities, shop, etc. As we look at prices, we determine whether we are getting good value for what we are purchasing. Sometimes we walk away and sometimes we buy based on the value. Now that works just fine unless you have fixed costs that are locked in. Let's take a look.

When you buy an automobile with a loan, you lock in costs based on a loan, gas mileage and future maintenance. Where you work locks in a certain cost based on commuting with the vehicle. Where you choose to live has fixed costs (not just housing, but your utilities as well). Here is a BIG point. By minimizing your fixed costs, you will have more leeway to deal with inflation on your flexible costs.

Flexible costs? The groceries, eating out, the coffee shop, entertainment, shopping, travel, gifts, different types of insurance, etc. Here is where you and I have more control over inflation. We get to look at these items and see where we can eliminate or reduce the costs during times of high inflation. Reducing fixed costs and increasing flexible costs is a good thing. We have more say so on our spending.

Let's start with food. You can dramatically reduce the inflation hit by focusing carefully on the groceries you buy and eating out less often. When I say dramatically, I mean one hell of a lot! Scrutinize every trip to the grocery store (consider other stores like Aldi's) with a more organized approach. This includes the morning coffee, which is easy to ditch with coffee you make at home. Big savings can follow.

Entertainment, shopping and travel can go hand in hand. Rethink how you see these approaches to life and where you spend your money. Redirecting activities can be game changers as you hunker down through an inflationary period. You can see the changes as temporary or possibly permanent. Permanent? You might realize that your new ways are better for you and your family than the old ways.

Insurance is another way to address the inflation monster. Go through each insurance policy you currently have and decide whether you really need it. If you don't, get rid of it. If you do, reduce the costs by raising deductibles, shopping around, and getting rid of pieces contained within each policy. Dig deep. There is usually plenty of waste in most family budgets when it comes to costs of insurance.

Gifting is another area to consider. Instead of gifting with money, redirect toward gifting with your stuff, time and/or energy. Help others person to person and that could include your church and charities. Giving unconditionally to help others is a great way to reduce the effect of the inflation monster. Spend less and give more. It can really make a big difference in the lives of others and YOU.

Let's look at some good news. That CPI number that you hear about does not reflect your own personal inflation rate. That's right. You have your own personal inflation rate and you can do something about that with the daily decisions you make with how you spend your money. By minimizing your personal inflation rate, the more broad rate has less of an impact on your life.

Is there a flaw in that approach? Sure. If you have locked in a bunch of fixed costs that are pretty hard to change, you will be stuck with something close to the overall rate. This is why it is so important to reduce your fixed costs and increase your flexible costs. By reducing your fixed and increasing your flexible, you will end up more in control of not just inflation, but your life. How do you do this?

Get rid of debt payments and that means paying off loans. Review your fixed costs now and eliminate where possible. The goal is to get your fixed expenses below 50% and ideally closer to 30% of your gross income. For example, if you and/or a spouse make $7,000 a month, then your goal would be no more than $3,500 a month and ideally, closer to $2,100 in fixed costs. Less stress to follow!

By getting your fixed costs down, you add more flexibility to your budget. That extra flexibility helps you deal with your personal inflation rate. You can say yes or no with your daily decisions vs. being required to make a payment that was agreed upon many years ago. Financial freedom comes to those who focus their efforts on minimizing fixed expenses while maximizing flexible spending.

So, what does this look like when you apply this approach. Well, the overall inflation rate might be 9% during a peak period, but your personal inflation rate might be 3%. You have cut it dramatically because you have added flexibility to your monthly expenses. You also reduced your stress over paying bills that are not locked in. This in turn adds to a better quality of life. YOU have tamed the inflation monster!

Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.

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