Tips to avoid falling into debt during times of inflation

Debt may seem unavoidable in a time marked by high inflation, when the cost of everything from groceries to entertainment has increased significantly. Thankfully, various strategies can help individuals avoid falling into debt.

• Prioritize an emergency fund. Unforeseen expenses, whether it’s major auto repairs or unexpected medical bills, can quickly land consumers in financial hot water. In fact, a recent survey from the Kaiser Family Foundation found that more than half of all adults in the United States report going into debt in the previous five years due to medical or dental bills. Roughly one in five respondents indicate they don’t ever anticipate paying off such debts. One way to avoid such a fate is to prioritize building an emergency fund that can be accessed whenever sizable, unforeseen expenses threaten to derail your finances. Resist any temptation to tap into an emergency fund during nonemergencies, and continue to grow the fund with routine contributions each month.

• Utilize automatic transfers via your bank. Banks enable account holders to set up automatic transfers, which make it easier than ever to save money and thus avoid debt. Consumers can examine their finances and determine how much from each paycheck they can automatically transfer into a savings or retirement account. Once that number is determined, set up the transfers so you are not tempted to spend the money come payday.

• Build and maintain a good credit rating. A strong credit rating is advantageous for many reasons, not the least of which is the cost savings associated with such a reputation. When borrowing money for big-ticket items like homes and vehicles, individuals with high credit scores generally receive better lending terms, including lower interest rates. Over time, the money saved by earning a lower interest rate on a mortgage can equal tens of thousands of dollars, and those cost savings can help consumers avoid utilizing credit cards to pay for unforeseen expenses like home repairs or medical bills.

• Become a disciplined consumer. Online shopping has made it easier than ever to spend beyond one’s means. A new wardrobe and expensive concert tickets are only a few mouse clicks away, and that accessibility can tempt consumers to spend beyond their means and accrue a substantial amount of debt. By resolving to remain a disciplined, savings-first consumer, individuals can avoid the pitfalls of debt.

Tips to save when inflation is high

The online financial resource Investopedia notes that the inflation rate is the percentage change in the price of products and services from one year to the next. Data from the U.S. Bureau of Labor Statistics indicates the inflation rate reached 8% in 2022, or four times the 2% rate of inflation the Federal Reserve aims to maintain through its various monetary policies.

Though the U.S. Inflation Calculator indicates the inflation rate cooled to 2.5% by the end of summer 2024, that may not comfort consumers who are still confronting high prices on various items, including housing. Indeed, inflation continues to affect people from all walks of life. However, consumers can consider various strategies to save even when inflation is keeping costs up.

• Use rewards to your advantage. Consumers now have an array of ways to pay for products and services at their disposal.

Conventional wisdom has long suggested credit cards should be used only in emergencies, but consumers who are confident they can pay off balances in full each month can consider using rewards-based credit cards to their advantage.

Such cards return a certain percentage of each purchase (typically around 1% to 2%) to consumers, and they can be used to purchase everyday items like groceries and gas. Of course, this only benefits consumers if they pay off their balances in full each month. If not, the interest charges on credit cards will almost certainly exceed the 1% to 2% cash back consumers earn.

• Open a high-yield savings account. The days of earning significant interest on savings accounts may seem like a distant memory, but high-yield savings accounts are still available at many financial institutions.

Consumers intent on building their savings in the face of a higher cost of living can look into high-yield savings account options at their own bank or another financial institution.

High-yield savings accounts typically mandate account holders maintain a minimum balance that is considerably higher than the minimum balances on accounts with lower interest rates, so this might not be an option for everyone.

But consumers who have already squirreled away a significant sum in their savings accounts may be able to grow their money, and thus overcome inflation rates, by transferring the balance to a high-yield savings account.

• Examine your spending. Perhaps the simplest way to save when inflation is high is to periodically assess your spending habits and make tweaks designed to save money.

Such assessments can include everything from identifying ways to save at the grocery store to determining if entertainment and other types of subscriptions are worth the investment.

— Metro Editorial Services