You've probably read about the record-high inflation currently facing people around the globe. But what you may not know is how inflation can affect your finances directly, especially if you have credit card debt. Here are a few things you need to know, plus tips for how you can mitigate the damage inflation causes to your personal finances.
Inflation is an increase in the cost of goods and services in the economy. It's measured by the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics. The CPI measures prices of a representative basket of consumer goods and services bought by urban consumers during a given period.
The cost of living is constantly changing, but inflation affects your wallet by eroding the value of your savings due to the increased cost of goods.
Consider the cost of a home. The house your parents raised you in most likely cost anywhere from $20,000 - $50,000 when they purchased it. Now, that home may cost nearly 10x that amount. If you had saved $35,000 back then, you'd easily be able to buy a home. Due to inflation, your $35,000 is only a down payment on a mortgage.
The main issue stems from inflation eroding your ability to repay your debts over time. If the value of your paycheck decreases as prices rise, it becomes harder for you to pay off your debts even if you continue to make regular payments on them.
When the cost of goods increases but your paycheck stays the same, it becomes more difficult to spread the money around evenly. Typically, your debt repayments get pushed back or the amount you pay every month gets smaller because you need to divert those funds elsewhere
There's not much you can do about the increasing cost of goods and services (inflation is a reality of life), but there are a few things you can do to minimize the impact it has on your wallet:
Inflation can cause more credit card debt if you don’t take steps to protect yourself from it. By understanding what inflation is and how it works, you can make sure that your finances stay healthy.
