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The Inflation Money Pit

Posted by Advocate Debt Relief Team

4 weeks ago / June 1, 2022

Does it feel like your money is dropping into a never-ending black hole? Inflation is a beast that can’t seem to be controlled, and more economists are talking about potential stagflation. The economic landscape of today can undoubtedly paint a bleak picture.

Many people feel lost in the financial quagmire and don’t know what to do. Some are starting to plant gardens in preparation for a severe food shortage; others are holding onto their current jobs for dear life, while a handful of people are simply waiting for the bottom to fall out of the economy. The question remains: How to prepare?

A good start is paying attention to the shifting prices of goods and services. Generally, staying up to date on current events and economic trends can help shift decision-making and avoid unwise financial decisions. More specifically, it’s vital that you assess your actual financial liabilities and settle those debts before things worsen.

The Reality of Today

Looking at current price drivers, gas and food are both on the rise. The national average for a gallon of gas is up 25 cents on the dollar with no signs of slowing down. According to the Bureau of Labor Statistics, the overall energy index rose 30.3 percent over 12 months.

Grocery store shelves are getting more sparse, but food costs are generally on the rise. In April, it was reported that food costs were up 10.8 percent, the highest since November of 1980. Farmers are not to blame either. Input costs for essential goods like fertilizer are up between 87 percent to 161 percent.

Some farmers anticipate a considerable price hike in food costs in Q4, sometime around Christmas. Many food contracts are on fixed prices until the end of Q4, and given the inflation rate since those contracts were last negotiated, they’ll likely try to recoup their costs and hedge their bets going forward. Ultimately, the consumer will pay through the nose for essential food items.

The Future

The Federal Reserve’s management of rate increases will largely determine what the future holds. Recently, the Fed raised rates by half a percent and earmarked another .25 percent, should the current course continue. This decision impacts business growth capacity and the ability of consumers to make large purchases because of higher-interest loans. The goal is to inspire more sensible consumer spending, but moves like this can have a chilling effect on market investors.

How to Assess

In all the financial uncertainty, the most crucial step you can make is to assess your current economic situation. The greatest enemy in an inflationary environment is looming debt, but all debt is not equal.

Assets and liabilities are the two kinds of debt you need to assess. Debt that can increase your net worth over time is considered an asset. Examples of assets are real estate, savings accounts (in the plus), classic cars, gold, collectible art, and generally items that add value. A liability is something you owe money to, like a person or financial institution. Mortgages, auto loans, student loans, and credit card balances are all examples of liabilities.

In an inflationary economy, it’s critical to assess your net worth to determine a reasonable path forward. A comprehensive comparison and contrast of the value of your assets and outgoing liabilities assess your net worth. A general rule is that if the debt grows faster than the total assets, you’ll be upside-down on your finances.

Pay it Down

Regardless of the kind of debt you have, a plan to get the debts paid off is necessary. Inflation is not slowing down, and high-interest debt should be a top priority in today’s economically unreliable space.

To navigate high-interest debt, there are generally two schools of thought. The snowball method first focuses on paying down the account with the smallest balance. Although maintaining minimum payments on other debts is a must, this approach puts most focus on the lowest balance. It allows people to get traction and stay motivated to continue down the right track. 

The other popular strategy is called the high-interest rate method. This approach focuses on debt with the highest interest rate first. Again, making minimum payments on the other obligations, this strategy instructs people to put the bulk of their resources toward eliminating the high-interest debt. Although there is debate over which one is most effective, you should do what works best in your situation.

Overwhelmed?

The stress of today’s economic landscape is genuine. Stress can prevent good judgment and create a reactionary plan not rooted in logic. Not to worry, there are professionals who can help. Advocate Debt Relief understands the complexities of the financial market and believes that everyone deserves a win. Please take a moment to get a free evaluation; it might be your first step towards financial freedom.

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