Inflation creeps into every corner of your life, from the prices at the grocery store to the balance in your savings account. It’s a reality that can make you anxious about your financial future. While the broader economy is out of your control, you can take steps to protect yourself from the psychological impact of inflation.
The Anxiety of Inflation
When prices start sneaking up, it’s natural to feel concerned. The thought of your hard-earned money not stretching as far can create a lot of stress. This is especially true when the inflation rate — the rate at which prices for goods and services increase — accelerates.
Recently, the inflation rate has climbed back up to 3.5%, which is decent, considering it was 9% two years ago. Ideally, you want the inflation rate to be at 2%, but the current rate is still high enough to make you concerned about your financial future.
When you see the cost of groceries, gas, and other essentials rising, it’s easy to feel like you’re losing control. This fear often leads to a phenomenon called loss aversion. This means you focus more on avoiding further financial losses rather than seeking potential gains.
A rise in prices also creates a sense of uncertainty about what’s coming next. Will they continue to grow? Should you be doing something different with your money? These concerns make it challenging to rationalize financial decisions.
Changes in Spending Behavior
It’s common to see changes in how you spend your money, especially when you see the media drawing attention to how much prices have increased. As such, you may switch from dining out to saving for groceries and gas.
You might even trade down from a favorite brand to ensure you spend less. Or, the changes in pricing could cause you to purchase items at “cheaper” stores like Aldi and Walmart, thinking it’ll save on costs.
One factor contributing to the rising inflation rate is wage growth. As of March 2024, wage growth is still running at 4.7%, which sounds like good news on the surface. However, this increase is above what’s considered to bring inflation back down to 2%.
Wages that grow faster than the economy can contribute to higher prices, as businesses may raise prices to cover their increased labor costs. This creates a cycle in which your paycheck may be larger, but it doesn’t go as far because the cost of living is also rising.
This situation can make you more cautious when spending and may lead you to decide to delay big purchases. This type of thinking might make you believe expenses could stabilize if inflation is brought under control.
On the other hand, some people feel pressured to spend now before prices go even higher, leading to what’s known as the scarcity mindset. It often drives impulsive buying decisions as you try to get ahead of future price hikes. Understanding these behavioral shifts will help you make more informed decisions about your spending during inflationary periods.
Impact on Savings and Investments
Inflation does more than affect your spending habits — it also affects how you save and invest. As prices rise, so does the cost of living, making it challenging to put money aside for the future.
After covering your essential expenses, there’s less left over to contribute to your savings or investment accounts. This issue is particularly evident across different generations, with each handling saving and spending differently.
For instance, millennials find themselves balancing student loans, rising housing costs and other financial pressures, causing them to spend about $47,000 annually. Due to this substantial spending, research shows 72% of this generation have less than $1,000 in their savings accounts.
With so little in savings, it’s clear that inflation and high living costs have strained millennials’ ability to save. Even a small emergency could push you into monetary stress, making it harder to maintain a secure financial future.
Psychological Coping Mechanisms
Between the pressures of inflation and the stress that comes with it, your mental and emotional well-being can take a toll. To cope with it all, many adopt strategies to help them feel like they’re in control, even if they don’t always align with the best financial decisions.
One common coping mechanism is retail therapy, where you make purchases for a mood boost or as a distraction from financial worries. It’s easy to see why this happens — buying something can give you satisfaction and stress relief. However, this feeling is only temporary.
E-commerce sites play a large role in facilitating this behavior, as they’ve become one of the three top channels for online purchases. They provide a convenient way to buy from your phone or computer anytime, anywhere.
Therefore, it’s easy to use online shopping for retail therapy, but this makes it harder to resist those impulse buys. This is especially true if you’re scrolling through TikTok’s shop and see all the wonderful things you could buy to make yourself feel better.
Another way you might cope with this is through cognitive dissonance. This strategy involves justifying spending more than you planned by convincing yourself it’s a necessary purchase or you’ll save money in the long run. While this will ease your spending discomfort, it often leads to buyer’s remorse when the satisfaction wears off.
These ways of dealing with inflation are understandable but sometimes lead to financial decisions exacerbating stress. The first step toward effectively managing them is recognizing the patterns in your behavior and finding ways to manage them accordingly.
Strategies for Managing Inflation’s Impact
There are several methods for coping with inflation emotionally and financially.
1. Make a New Budget
If the inflation costs become too much of a burden, consider starting fresh with a new budget. List your fixed expenses, such as rent, mortgage payments and utilities. Then, add in your variable ones, like groceries and transportation.
Subtract those expenses from your income to see what you have left over for the month. This gives you a clear picture of your financial situation and can make it easier to stick to a spending plan.
Additionally, consider using a simple tool like Excel to keep track of your income and expenses. You can create a basic spreadsheet to monitor your spending and savings. Excel also offers customizable templates that make it easy to get started, even if you’re a beginner.
1. Create a Shopping List and Stick to It
Another strategy is to create a shopping list to curb impulsive spending. By planning your purchases, you’re less likely to feel swayed by items that influence you to purchase on a whim.
Retailers are well aware of how to entice you into impulse buying, and they often do this by strategically placing products at eye level. For instance, they might place the top snack items at about 160 cm — right where they are most visible and accessible. You can avoid falling into these traps by ensuring you stick to your shopping list.
3. Set Financial Goals for Yourself
Short and long-term financial goals are essential for managing inflation challenges. When you have specific objectives in mind, staying focused and disciplined with your money becomes easier.
Start by determining your short-term goals, such as reducing high interest or building an emergency fund. These are achievable within a shorter time frame and can provide quick wins that motivate you.
At the same time, it’s important to establish long-term goals like investing for retirement or saving for a major life event. Inflation can make it tempting to focus only on the present, but keeping your eyes on the bigger picture will help you make decisions that benefit you in the long run. For instance, continuing to invest ensures you build wealth over time rather than letting inflation erode your purchasing power.
4. Manage Debt Wisely
When interest rates are high, carrying debt can become even more expensive and consume a large chunk of your monthly budget. Focus on paying down your high-interest debt first to reduce your spending on interest payments over time.
This strategy includes starting with your highest interest rates, such as credit cards. Then, consider making extra payments whenever possible to accelerate your progress. As you reduce your debt, you will lower your monthly expenses and create more financial flexibility.
This additional room in your budget can then go toward savings, investments and other priorities. As such, you build a stronger economic foundation despite inflation pressures.
5. Focus on the Things You Can Control
In times of inflation, it’s easy to feel overwhelmed by things out of your control, like rising prices and economic uncertainty. That’s why it’s important to focus on what you can do to improve your financial situation.
One way to do this is by finding ways to boost your income. A second job or a side hustle can earn you more to cover necessary spending or speed up your progress toward financial goals.
In addition to increasing your income, you can also seek cost-effective alternatives for things you regularly spend money on. This could mean getting creative with your savings on everyday expenses or switching to more affordable brands. Taking such steps will help you stay on track with your financial goals.
Staying Resilient in Uncertain Times
Inflation can feel like a huge undertaking. By taking control of your financial habits and focusing on what you can manage, you can ride the wave of these uncertain times smoothly.
However, avoid thinking of it as a time of survival — consider it an opportunity to strengthen your finances. By implementing several key strategies, you can set yourself up for long-term success.
