Inflation and Debt
Inflation may have a direct impact on debt. It can lead to higher interest rates on loans and credit cards, making it more expensive to borrow money. Below, we’ll dive deeper into the meanings of inflation and debt, as well as how to combat inflation and manage debt.
What is inflation?
The rate that the cost of goods and services goes up is known as inflation. Inflation means that your money will buy fewer products and services than it did in the past. It’s measured by the consumer price index or CPI, which tracks the average change in prices for things like housing, food, and health care.
What causes inflation?
There are a few major causes of inflation. Cost-push inflation is when it costs more to produce certain goods and services. Demand-pull inflation happens when the demand for goods and services is high and supply can’t keep up. Built-in inflation is the idea that workers expect their pay to go up when the prices of goods and services increase so they can maintain their standard of living. H2
What is debt?
Debt is any money you owe to another person or business. When you borrow money, you usually make an agreement that you’ll repay it with interest, according to a set repayment schedule. Some common types of debt include mortgages, personal loans, credit cards, car loans, and student loans.
How does inflation affect debt?
When inflation happens, interest rates on variable-rate loans and credit cards will likely increase. This is because lenders and creditors want to be compensated for the lower purchasing power of the money you’ll pay them in the future. This can make it more expensive to take out a loan or credit card.
Inflation will cause prices to go up and make our dollars less valuable. Over time, however, if your debt is fixed (i.e. the principal balance and the interest rate are not increasing) the relative value of your debt is decreasing because you are making payments with dollars that are less valuable in the future.
How to combat inflation and manage debt
Here are some tips to help deal with inflation and keep your debt under control:
Make consistent on-time payments
Pay all your bills (your mortgage, rent, car loan, personal loan, student loans, and credit cards) on time, every time. Keep in mind that one missed payment can hurt your credit score and set you up for higher interest rates down the road.
Lower your interest rates
Do your best to reduce your interest rates as much as possible. The right way to do so is to improve your credit score. You may also lock in lower rates if you shop around and compare offers. Another option is to negotiate with your current lender or credit card company.
Set up automatic payments
Automatic payments can make it easier to make timely payments and keep your credit in good shape. Some lenders will even give you an interest rate discount if you enroll in them.
Other ways to combat inflation
Consider these additional strategies to fight inflation:
Create and stick to a budget
A budget is a spending plan based on your income and expenses. Create a budget and make every effort to stick to it so you can avoid or reduce debt. Some of the most popular budgets include the pay yourself first budget, envelope budget, 50/30/20 budget, and zero-based budget.
Find ways to cut costs
Take a close look at your monthly bills and expenses. Figure out how you can reduce them. You might decide to cook at home more instead of eating out, cancel the gym membership you rarely use, or downsize to a more affordable house or apartment.
Increase your savings
The more money you have saved up, the less you’ll need to rely on loans and credit cards. To boost your savings, set up a designated savings account and automate your savings. Also, cut back on expenses and pay down your debt as much as possible.
Investing is when you buy stocks, bonds, and other assets that can go up in value over time. It’s a great way to put your money to work and build wealth. The easiest way to invest is through a 401(k) or IRA, especially if you’d like to save for retirement.