From a Savvy Finance Professor: 5 Tips for Surviving Inflation
This article appears in the fall 2022 issue of University of Denver Magazine. Visit the magazine website for bonus content and to read this and other articles in their original format.
As you and your malnourished wallet are surely aware by now, inflation has spiked. After more than two years of struggling through a global pandemic, beleaguered U.S. consumers are contending with skyrocketing inflation rates not seen in four decades.
On a macro level, the cause of the current inflationary flare-up is a simple but volatile combination of strong demand and limited supply, according to Chris Hughen, co-director of the Marsico Investment Center and associate professor of finance at the University of Denver.
“The availability of many goods and commodities has been affected by the war in Ukraine, lockdowns in China and the tight labor market in the U.S.,” Hughen explains. But he is quick to caution that this is only part of the story.
“While many of these issues should be temporary, they only explain about one-third of the surge in inflation,” he says. This sheer number of factors driving inflation makes it extremely difficult to predict when price increases will subside.
Wage growth and employment levels remain high, especially in Colorado, where the 3.4% unemployment rate sits just below the national average. Hughen notes that while this may suggest continued strong demand, the Federal Reserve is determined to slow the pace of growth by raising interest rates, which could risk tipping the economy too far in the other direction and into a recession.
All this leaves financial experts and consumers alike highly uncertain about the economic future. While there are no easy solutions, the following five tips will help maximize your chances of riding out the storm.
The best way to withstand a bout of financial hardship, Hughen suggests, is to budget for it in advance. “The long-term goal of all households should be to hold at least six months of living expenses in cash to cushion their ability to ride out tough economic times,” he says.
Unfortunately, for many already working with a tight budget, saving up a financial cushion is not an immediate option. In these cases, budgeting becomes even more important. A strict accounting of all income and expenses will help inform difficult decisions about further belt-tightening.
2. Apply for assistance early.
Sometimes, no degree of scrimping is enough to make ends meet. “Sadly, there are no easy solutions for stretching an already tight paycheck,” Hughen says. But planning a budget in advance can give you more warning time before desperation sets in.
Use this time to apply for government benefits and research other forms of assistance. Many government programs are available to help those in need, but the application process can be slow, so apply as early as possible.
In Colorado, the Department of Human Services and Colorado Peak are great places to start. A simple Google search will turn up similar sites in most other states, as well as local programs and private charities.
3. Avoid new debt, especially on credit cards.
Short-term interest rates increased rapidly in 2022, and Hughen expects this trend to continue throughout the remainder of the year. This makes loans and lines of credit with variable interest rates, such as credit cards, particularly undesirable.
Fortunately, unlike short-term rates, the longer-term credit outlook has remained rosier. “Financial markets indicate that high inflation is not expected to persist over the long run,” Hughen reports. “This bodes well for consumers who can wait to borrow.”
4. Put off big purchases.
Hughen says buying a house, car, major appliance, or other expensive item simply makes less sense during times of economic uncertainty. It will eat into your savings or, worse, add to your debt burden. Even with inflation causing prices to go up, it’s still better to wait if you can.
5. Invest for the future.
Inflation-driven volatility in the stock market can make even seasoned investors nervous. The best investment approach, according to Hughen, is one that makes sense in both good and bad economic times.
First, Hughen advises to “invest for the long run,” meaning choose an investment that you would not need to sell for at least 10 years. Second, he suggests diversifying your investment portfolio among the major asset classes, including stocks, bonds and real estate.
Finally, as far as your retirement account goes, Hughen says, “Pay yourself first!” In other words, continue making regular contributions if you can, regardless of the economic weather. When it comes to investing in general, and retirement funds, in particular, slow and steady wins the race.