How to Control Your Personal Inflation Level

Editor's Note: This story comes from Wealthramp.

Whenever we hear that inflation is rising and the Consumer Price Index (CPI) shows inflation at say, 3%, it means prices we pay for the same everyday goods and services are going to cost consumers 3% more this year than last.

In other words, the same bag of groceries or tank of gas you bought a year ago costs more now. And next year, if inflation rises to 4%, you’ll pay that much more.

Think about what happens if your rent goes up by 3% next year. Inflation erodes the value of your dollar, and the only way to stay ahead of inflation is to either cut your budget, bring in more income (wages) or earn higher returns on your investments.

Five years ago, before the COVID-19 pandemic, the annual inflation rate was 2.4%. Three years ago, as the pandemic took hold, inflation jumped to over 4%. Now, it’s down but stubbornly still above 3%.

Who Does Inflation Hurt the Most?

Retirees are hurt most when inflation rates are higher. That’s because when you’re no longer working, there are no more opportunities to get a promotion or salary raise.

Most people who’ve stopped working and are fully retired live on fixed incomes. That means there are at least 50 million retirees in the U.S. living on pretty strict budgets.

Most rely on a combination of three main sources of income: the earnings on their savings and investments, monthly Social Security checks (which are adjusted annually for inflation in order to keep up), and “other” sources of retirement income, such as a pension, an inheritance or, perhaps, some part-time work that helps fund their lifestyles.

Rising inflation for them becomes a threat to their budgets. If it persists, it can become a real struggle to make ends meet.

What You Can Control When It Comes to Inflation

Whatever’s happening with inflation, interest rates or the stock market are external forces you can’t control.

What you may be able to control is how you take proactive steps that help maintain your lifestyle when prices are rising and your income isn’t.

Here are tips for staying ahead of inflation.

Your Investments

If you have $250,000 in a bank certificate account that yields 4% while inflation is running at 4%, your real return is zero. You’re not losing money, but you’re not getting ahead either.

To beat the inflation rate, your mid-to-longer term investments (meaning more than five years) need to grow faster than the rate of inflation. Not considering inflation is akin to financial planning without considering taxes.

Advisors will recommend any number of possible combinations of investments for both your cash accounts, such as Treasurys, or for long-term investments, including some blue-chip dividend-paying stocks.

There is no one-size-fits-all investment strategy that fits everyone.

It really takes a highly personalized approach to factor in things, including a game plan to keep taxes and all related investment costs as low as possible in order to get to the sweet spot — the highest portfolio returns without taking on more portfolio risk.

Once the strategy is set, it has to remain fluid in order to respond to changes both in the economy and in your own life.

Your Spending

It doesn’t matter if you’re 25, 52 or 77, we’re all on a budget, and inflation is eating your cash. The annual inflation rate has been at or above 3% for months now. You’re probably wondering where all your money has been going.

And while your mind is on money coming in from your investments, you should also take a closer look at what’s going out.

How much is it costing you every year to stay invested in your investment funds?

You might be startled to see how “junk” fees and expenses inside your investments have added up. That’s money out of your pocket that you might not realize you’ve been giving away unnecessarily for decades.

I’m talking about old legacy 401(k) funds you’ve hung onto, or the IRA account you once opened at your bank that sold you a mutual fund with a 1.5% annual management fee. Look under the hood and you might discover commissions buried in the fine print of a brokerage account.

Excessive Fees

Did you know that for a typical $1 million portfolio, those excessive fees can add up to several hundred, if not thousands, of dollars every year? Those kinds of expenses can be replaced with low-cost index funds and ETFs.

When you begin to work with an advisor, ask upfront: “What’s the game plan going to be to keep all the investing costs as low as possible going forward?”

A fee-only advisor’s job includes finding inefficiencies that add up to higher returns for you.

Beyond investment “junk” fees, I find it useful to go through and “Marie Kondo” all of your household fees.

For instance, I didn’t even realize I’ve been paying for two separate Netflix accounts for the same house. Eliminating unwanted or forgotten subscriptions sounds trivial, but the purge is necessary and every penny helps. I also look at bills I put on auto-pay (10 years ago) that I didn’t even know I’ve been paying.

The point is to take control of what you can. It feels really good to see how much waste you can cut without compromising your lifestyle.

So What Can You Do?

Okay, back to inflation. The biggest fear we all have is running out of money during retirement. Factor in inflation and the whole process is sped up.

Big or small, finding ways to boost retirement income and recapture any money that’s going out is a start. If you can, also boost your returns by rebalancing your portfolio to earn more income from investments (and minimize taxes).