Revenge Spending and Inflation
After COVID took us all by storm and kept us from living our dreams for 2 years, we’ve gotten our revenge by buying ALL the things and going to ALL the events. COVID thinks it’s going to stop us from enjoying our lives? Think again.
This phenomenon is known as “Revenge Spending” – when someone goes through a tough period and then engages in retail therapy to make themselves feel better. While revenge spending can boost our economy, it can also keep prices high. If the demand is there, why would prices decrease? And in enters “Inflation.” With revenge spending at an all time high, inflation has also remained high. Currently inflation is at about 4%, which, while the lowest it’s been since 2021, it’s still twice as high as the Fed would like for it to be.
If you’re like me… you’ve been hearing this word “inflation” for so long now, it’s like the teacher in Charlie Brown. How does inflation affect us personally, and what can we do about it?
First of all, think about the cost of rent over the past year. In 2022, the average inflation rate increased to over 8%. Meaning the cost of everything increased over 8%. If your rent was $1,500/month in 2021, it would have increased to $1,620 in 2022 using that inflation rate. In that example, that’s $1,440/year in additional rent you’re paying. That’s like paying a whole extra month of rent at the previous rate. Inflation doesn’t just affect rent, though. It affects everything. Gas, eggs, milk, childcare. If inflation increases 8%, that means your cost of living has increased 8%. If you’re making $40,000/year and inflation jumps to 8%, your cost of living raise alone should give you a $3,200 raise. Raise your hand if you got a $3,200 cost of living raise this year. Oh, no one? Cool.
Unfortunately, inflation is a pretty tough thing to control because higher interest = employees wanting higher wages. Being paid more = more money to spend. More money to spend = more demand and increasing prices.
We’ve established that inflation sucks. And here’s the thing. There isn’t really much we can do about it personally. But we CAN make sure it doesn’t bite us in the a$$. Here are a few ways…
Prioritize Your Emergency Fund - Make sure you’re consistently putting your money away in a high-yield savings account to build that emergency fund. Rates for high-yield savings accounts these days are 3-4% and even higher. At our current inflation rate of 4%, those savings accounts can just about keep up with it. Your money will go a lot farther if it’s increasing at the same rate as the prices.
Curb Your Spending - Guys, I know. No one likes to be told that they shouldn’t spend $6,000 for those once-in-a-lifetime nosebleed seats to see Taylor Swift. I get it. But at some point the YOLO lifestyle is going to hurt you, and it will probably be sooner rather than later with the way inflation is going. Instead of buying something as soon as you decide you have to have it, maybe give it 24-48 hours to think about it. At your hourly rate, how many hours would you have to work to make that money back? If it’s worth it, go for it! If it’s something that can wait, put it in your “save for later” and try again in a month.
Consider Investing - Contact a Financial Advisor or invest on your own through an app like Fidelity and set up a brokerage account such as a Roth IRA. Historically, Roths deliver between 7% and 10% annual returns. Even if you’re down one year, chances are good that you’ll be up by the time you retire. Investing sounds scary but it’s much safer than you might think. The downside is that you won’t want to touch the money until you retire. The upside is that once you retire, you’ll be thanking Past You for thinking of Future You.
That’s the scoop on Revenge Spending and Inflation! I’d love to hear how you’re keeping yourself safe from Inflation in the comments.
