4 Sneaky Ways Inflation Can Ruin Your Finances

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  • There are obvious ways inflation takes a bite out of my budget, like at the grocery store.
  • But financial planners say inflation also reduces the value of my savings and could hurt my business.
  • Talk to a CPA to see if inflation will affect your taxes, and be aware that it can be difficult to get a loan right now.

I had the best intentions of fine-tuning my finances in 2022. I wanted to find a more appropriate investment strategy, establish (and stick to) a budget that would allow me to save more money each month, and find ways to contribute more to my SEP IRA retirement account.

But staying true to those intentions has been difficult, especially with inflation. I notice the impact of inflation on my finances on a daily basis. Everything costs more, from groceries to the salespeople I hire to help me with my business. It forced me to spend outside my budget, save less money, and withdraw money from the market to pay my bills.

It made me wonder if inflation is hurting my finances in ways that I don’t realize. It turns out the answer is yes. Here’s what four financial experts shared about how inflation hurts our money in not-so-obvious ways.

1. Your money loses value in savings

A big mistake I’m working to fix is ​​where to put the excess money I have in my savings account. Keeping it in this account, with an interest rate of only 0.05%, is not the best strategy for my finances since the money does not grow, according to financial planner Nicole Asher.

Asher says keeping money there is just a way to safely lose money, because the value of money in that account will continue to fall as inflation rises.

Instead, Asher recommends putting that excess cash to work. To me, that might look like using the money to invest in index funds, real estate, or contributing more to my retirement account. For others, it may mean putting some of it into a higher-interest CD or buying savings bonds.

2. Your business income may 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 challenges that may arise, from a future pandemic to a loss of customers.

According to financial planner Aaron Clarke, many business owners may not yet see the impact of inflation on their business income, but it is coming.

Since inflation takes a while to trickle down to the economy, Clarke says many new entrepreneurs, freelancers and gig economy workers could feel the brunt of it. This is because businesses and individuals could start to hit the pause button or be hesitant to buy unnecessary services or goods, which means there could be less demand for the services offered by gig workers. and the self-employed, 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 could also mean preparing for a drop in income. To do this, they must look for ways to reduce costs and maintain a reserve of cash for business needs.

3. Your taxes may be different

Thinking about the different ways inflation affects my finances, I never thought about how it might impact my taxes.

Financial planner Charles H Thomas III says that while some IRS rules are inflation-linked and are adjusted regularly to keep pace with inflation (for example, IRA contribution limits), some are not. don’t work that way.

“Many other IRS thresholds are fixed dollar amounts and don’t increase with inflation, unless congressional action is taken,” says Thomas. “For example, the American Opportunity Tax Credit, commonly used by households with someone in college, does not change with inflation or higher tuition fees.”

For that


tax credit

, you can get a maximum annual credit of $2,500 per qualifying student. However, with inflation, the amount of this credit will not increase, although the cost of college education – including room and board – may increase during that year.

Before tax season rolls around, Thomas says it’s best to plan for rising 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 may not need the money now, you may find yourself looking for a loan all the way (whether personal, home, or for your business) and find that you have trouble getting one.

Besides the fact that borrowing becomes more and more expensive as the Fed rate rises, financial expert Christopher Liew says that with rising inflation, banks generally become much stricter about who they lend money.

“If you’re not in a good financial position, they’ll assume that rising inflation is probably going to put you in even worse shape,” Liew says.

Liew says it’s because banks think it might be harder for you to make timely payments, which means they’re less likely to give you a loan.

If so, before you need a loan, see what you can do to work on your overall finances (increase your


credit score

repayment of debts, etc.) in order to be in a better position to obtain a loan at a fair rate.

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