Inflation weighs heavily on adults of all ages. And it can be particularly burdensome on young professionals who are just starting to gain traction in their career, have bought their first home and are starting to raise a family.
Significant increases in the costs of most goods and services decrease purchasing power and hinder the quality of our daily lives. These days inflation is hovering above 9%, its highest level in 40 years. If we are honest with ourselves, it is really the highest inflation ever as the way we calculate inflation has dramatically changed over the year and, under the methodology for calculating inflation in the 1980s, we would be closer to 17% than 9%.
What does that mean for people in their 20s and 30s with a growing set of responsibilities and the desire to enjoy the fruits of their labors?
There are steps they can take and actions to avoid to help them navigate a lengthy period of high inflation. I will outline several below:
Use the 70/30 Rule to live below your means and avoid debt. As with any journey that involves overcoming adversity, before lifting the weight off your shoulders, you have to learn how to carry it for an indefinite period of time. For consumers, that means living below your means and avoiding debt during the inflationary period. If you are using debt to maintain your standard of living, you have a ticking time bomb on your hands. Statistically, it is only a matter of time before you run out of credit and face financial ruin. My best advice during inflationary times is to live off of 70% of your take-home pay to give yourself some wiggle room as prices creep higher. Use the remaining 30% for giving (yes, I said giving), paying down debt, and investing in fairly equal amounts. If you have no debt, just add that portion to your investing.
Postpone the new car purchase. New car prices have been hovering at record highs, driven by pandemic-related parts shortages, factory shutdowns and a scarcity of computer chips. Used-car and truck pricesalso have soared 16% over the past year, but have been dropping. These facts tell us to delay any major purchases and to possibly take advantage of the inflated car market if you have a car in good condition to sell. The inflation in used cars can give the seller a nice cash infusion if it is not needed or can be replaced with a car at a lesser cost. Repos are up, so time is on the side of the buyer, and be patient if you are in the car market. If you absolutely must buy a car now, make sure you are doing so without incurring debt on the purchase. Car debt is horrible debt.
Continue investing. If you are an investor, you should be looking at companies that are also “living below their means” – i.e., profitable. Look at companies with free cash flow (i.e., ones that bring in more money than they spend) and that share that cash with their shareholders in the form of dividend payouts. You will want to invest in companies that either have proven brand recognition that attracts people regardless of increases in price, or companies that are financially strong and create products that are in demand regardless of inflation.
The classic example of a brand people want regardless of inflation is Coca-Cola. It has prospered during previous inflationary cycles. Examples of brands people need are utilities, mining companies, and even real estate investment trusts (REITs). There remains strong demand for all three even though Inflation is at its highest levels in half a century.
Reduce your expenses. This is easier said than done, but taking a deeper look at your bills and finding ways to reduce or eliminate some can make a notable difference in your monthly budget during an inflation crunch. There are really three levels of spending: need, want and wish. Figure out your “need” budgetsuch as rent and food and write it down. Then add in your “wants” – your cellphone, cable, Netflix, eating out, your three gym memberships, etc. – and writethose down. Wishes are things like once-in-a-lifetime trips or expensiveexpenditures. Once you know your categories, concentrate on what items in thewants and wishes list you can do without for now. Those will be your sources ofgreatest savings.
I know it can be painful to cut something you really want and like, but consider it a temporary gesture that your future self will appreciate. You will see others get hopelessly in credit card debt and face the consequences, which is far more painful than temporary cuts.
Simply put, as young people grow in their careers and grow a family, they’ll have to be smart and more disciplined than ever to prevent inflation from getting them down. These challenging times will pass. They need to keep their eye on what’s important in the future in order to pass the test they face now.
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