Inflation, which is the rise in prices over time, decreases purchasing power, especially when wages are stagnant. As of September 2022, consumer prices were up 8.3 percent for the year, and they may increase even more before the end of the year.
Beyond increased consumer prices, inflation can have other effects as well, both direct and indirect. Let’s look at a few ways that inflation could impact your finances.
Savings are worth less
You might think of inflation in terms of how it affects your income and spending power, but it also affects the money you’ve saved up. When prices go up, the value of your money goes down. This means that the same amount of money can buy less than it could a year ago. Over time, inflation can have a significant impact on the purchasing power of your savings.
Higher interest rates
One of the more unexpected effects of inflation is it can lead to higher interest rates. When inflation is high, the Fed often responds by raising interest rates in order to manage it. This can have a ripple effect on the economy and may lead to higher borrowing costs for businesses and consumers alike.
Increased interest rates may mean new loans, such as mortgages, will carry a higher interest rate and it will cost more per month to borrow the same amount of money. This may cause some homebuyers to accelerate their search and try to lock in a rate while it’s still relatively low. Higher interest rates also affect refinancing. If you’re thinking of refinancing your student loans, for example, it may be a good idea to look into student loan refinancing before interest rates get even higher.
Debt can have a bigger impact due to increased costs
Inflation can also indirectly affect your monthly loan payments. Although your monthly loan payments will likely stay the same (unless you have a variable-rate loan and interest rates change), increased costs of goods and services can make fixed costs like debt or rent feel like a bigger burden on your budget. For example, when your grocery and utility costs are increasing, making your $150 monthly student loan payment may mean you have to cut your budget elsewhere or dip into your savings.
If you’re worried about how inflation may affect your ability to make monthly payments, it’s worth considering refinancing loans, such as student loans, for a potentially better rate. In a rising rate environment, it may be smart to refinance sooner rather than later before future increases occur. Of course, every situation is different, so be sure to compare your options and choose the loan option that’s right for you.
Keeping an eye on inflation
Inflation can have some unexpected effects. It can lead to higher interest rates, which can lead to increased borrowing costs. It also causes the value of money to decline, making it harder to afford existing costs as well as save for retirement or other long-term goals. It’s important to stay aware of the potential effects of inflation so you can adjust your budget accordingly and stay on track to achieving your financial goals.