How I manage my personal inflation rate

Behavior ultimately determines the lived experience of inflation.

written by oz chen

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Firefly man throwing blanket over a fire represented by dollar signs, a metaphor for increasing infl

As a kid, I remembered my Mom bought flights to Taiwan to see family for the first time since we moved to Stateside. It was extremely expensive for a single mom, with flights costing about about $1000 in the early 2000s. Fast forward to today, and it’s still relatively easy to nab flights to Taiwan for less than $1000.

Not only have flights gotten cheaper, but so have internet, mobile services and tech gear.

Of course inflation spiked during the pandemic and we all feel the pressure of higher prices for gas, rent, and dining out, just to name a few.

Inflation itself is not necessarily a bad thing.
All it means is that prices go up.
“But isn’t it bad that prices go up?”

The key financial concept I learned post pandemic? Inflation is not one-size-fits all.

How inflation works for or against you

Consider these rough estimates:

The math is on the wall: you want to earn higher rates while avoid paying high rates. Wealth is created in managing the difference.

Higher rates help savers and asset holders.
While prices for everyday goods increase, so can the price of stocks, real estate, and even cash sitting in high yield savings.

Higher rates hurt borrowers and debt holders.
The interest rate increases means that debt gets more expensive. This is the difference between paying 0% for debt (free loans) vs 20% for the same debt (average credit card rates now).

Because the price of assets can inflate just like everything else, the takeaway is simple: to build or at least maintain wealth, you have to invest.

But not everyone invests…for many interesting reasons.

We’ve already established that inflation doesn’t happen equally across products, but the juicier psychology of money is that inflation doesn’t happen equally across people.

Not all people experience inflation equally

Take two people who just landed their first six figure jobs.

  • Person A: pumped about their $100K salary, decides to upgrade their apartment and car.
  • Person B: treats themselves out for a nice $200 dinner, then keeps all costs the same while increasing their savings rate from 10% to 20% a month.

Due to lifestyle inflation, the Person A is going to experience a much higher rate of inflation.

Behavior ultimately determines how much real inflation one experiences.

Now I’m going to break down all the ways I try to manage my own personal rate of inflation:

  1. Establish your monthly spend

First, nothing else matters until you figure out your monthly spend. This helps you get a baseline for how much your life costs. Then you have a certain range to work with.

Example: If your life costs $5000/month this year, prepare for a 3% increase to $5130/month next year.

On the other hand, doing some quick budgeting can help you shave off hundreds of dollars in monthly spend.

2. Shopping

  • Run your spending through a no-annual fee, 2% cash back card like the Wells Fargo Active Cash.
    • If inflation is 4%, then you can decrease it by half to 2% through your spending.
  • Use Rakuten and Honey for extra cash back + coupons when online shopping
  • Plan your purchases ahead of time and seasonally, e.g. technology purchases around Cyber Monday.

3. Cook more, eat out sparingly

From January 2019 to January 2024: food at home at 1.2% and food away from home at 5.1%. So the prices of dining out have gone up 4.25 times more than cooking at home. Meaning a $50 meal should be able to be made with $11.76 of goods. Cooking is a financial skill.

4. Invest and use high yield savings

  • This is the obvious one. If inflation goes up at least 3% annually but the stock market has averaged 10% per year, you can hope to capture a 7% difference in gain.
  • Think investing is scary? You can start with something easier, which is open up a high yield savings account like the one I use, Wealthfront, to earn more than 5% for your cash, which is only earning 0.01% in normal accounts held by big banks.

Perhaps most important of all, consider minimalism as a weapon against unchecked consumerism.

No one wants to go backwards in lifestyle. But it’s the ones who are most flexible in adjusting their lifestyle to the realities of their financial picture – and money goals – who are most suited to beat inflation and thrive.

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