I had the best intentions to fine-tune my finances in 2022. I wanted to figure out a more fitting investment strategy, build (and stick to) a budget that allowed me to save more cash every month, and find ways to contribute more to my SEP IRA retirement account.
But staying true to those intentions has been hard, especially with inflation. I notice how inflation impacts my finances on a daily basis. Everything costs more money, from groceries to vendors I hire to help with my business. This has forced me to spend outside my budget, save less money, and pull cash out of the market to pay bills.
- There are obvious ways inflation is taking a bite out of my budget, like at the grocery store.
- But financial planners say inflation is also reducing the value of my savings, and could hit my business.
- Talk to a CPA to see if inflation will affect your taxes, and know it may be hard to get a loan right now.
This made me wonder if inflation is hurting my finances in ways I’m not realizing. It turns out the answer is yes. Here’s what four financial experts shared when it comes to how inflation is hurting our money in not-so-obvious ways.
1. Your cash is losing value in savings
One big mistake that I’m working on fixing is figuring out where to put excess cash I have in my savings account. Keeping it in that account, with an interest rate of just 0.05%, isn’t the best strategy for my finances since the money isn’t growing, according to financial planner Nicole Asher.
Asher says that keeping cash there is just a way to lose money safely, since the value of the cash in that account will continue to trickle downward as inflation rises.
Instead, Asher recommends putting that excess cash to work. For me, that might look like using the cash to invest in index funds, real estate, or contributing more to my retirement account. For others, it might mean putting some of it in a higher-interest CD or buying savings bonds.
2. Your business income might not be prepared for what’s to come
As a business owner, I’m always looking for ways to strategize and plan for any potential financial challenge that might come up, from a future pandemic to a loss of clients.
Financial planner Aaron Clarke says that many business owners might not see the impact inflation is having on their business income yet — but it’s coming.
Since inflation takes some time to trickle through the economy, Clarke says that many first-time entrepreneurs, freelancers, and gig-economy workers might feel the brunt of this. That’s because businesses and individuals could start to press the pause button or hesitate to purchase unnecessary services or goods, which means that there could be less demand for services offered by gig workers and freelancers, or less disposable income for consumers to spend on products launched by first-time entrepreneurs.
Clarke advises freelancers and entrepreneurs to prepare their finances for inflation now, which might also mean preparing for reduced income. To do this, they should look for ways to trim costs and keep a cash reserve for business needs.
3. Your taxes might look different
When thinking about the different ways inflation impacts my finances, I never thought of the way it could impact my taxes.
Financial planner Charles H Thomas III says that while some IRS rules are linked to inflation and are adjusted regularly to keep pace with inflation (for example, IRA contribution limits), there are some that don’t work that way.
“Many other IRS thresholds are fixed dollar amounts and do not move up with inflation, short of congressional action,” says Thomas. “For example, the American Opportunity Tax Credit, commonly used by households with someone in college, does not change according to higher inflation or college costs.”
For this tax credit, you can get a maximum annual credit of $2,500 per eligible student. However, with inflation, the amount of this credit won’t increase, even as the cost of college — including room and board — might increase over that year.
Before tax season comes your way, Thomas says it’s best to plan for increased costs and if you can, meet with a tax professional now to avoid surprises next tax season.
4. You might have trouble getting a loan
While you might not need the money now, you may find yourself looking for a loan down the line (whether personal, home, or for your business) and discover you have trouble getting one.
Aside from the fact that borrowing is becoming increasingly expensive as the Fed’s rate rises, financial expert Christopher Liew says that with increased inflation, banks usually become a lot stricter about who they loan money to.
“If you’re not in a good financial position, they’ll assume that the increasing inflation is likely going to put you in an even worse position,” says Liew.
Liew says this is because banks think it might be harder for you to make timely payments, which means that they are less likely to give you a loan.
If that’s the case, before you need a loan, see what you can do to work on your overall finances (increasing your credit score, paying off debt, etc.) so that you can be in a better position to get a loan at a fair rate.
By Jen Glantz
This Business Insider article was legally licensed by AdvisorStream