10 Tips to Manage Debt During Inflation

Managing debt can be stressful in the best of times, but with the right strategies, you can stay on top of your finances even during inflation. By understanding how inflation works, you can take steps to protect yourself from rising interest rates on loans and credit cards. 

We’ll explain the connection between inflation and debt, and share practical tips to help you confidently manage your payments and budget. 

How inflation works 

Inflation measures the annual increase in the cost of goods and services. It is calculated using the Consumer Price Index (CPI), which monitors the average price change of items like housing, food, and healthcare. 

In a normal scenario, inflation rises steadily by around 2% yearly, typically in line with wage increases. However, if inflation outpaces wage growth, your money will have reduced purchasing power. This means goods and services become more expensive, making it challenging to manage expenses. 

Inflation and debt 

During inflation, interest rates on adjustable-rate loans and credit cards will likely rise. Lenders and creditors do this to offset the decreasing value of money they will receive in the future. 

Additionally, inflation can escalate the cost of existing debts. For instance, if you obtained a variable-rate loan when inflation was at 2%, and it has now risen to 4%, the money you repay loses value over time. 

Consequently, creditors increase the loan's interest rate, requiring you to pay back more. 

Is inflation good when you have debt?

Inflation can raise interest rates on your debt, making it harder to pay off. 

When everyday expenses like groceries, gas, rent, and utilities go up, you have less money to make the minimum monthly payments on credit cards, mortgages, student loans, and other debts. This can lead to additional fees and penalties, further increasing your debt. In some cases, missing payments can result in defaulting on your debt and legal consequences. 

However, inflation can sometimes help if lenders cannot raise interest rates and wages increase along with inflation. In this situation, you are earning more, and your debt value decreases, making it easier to pay off. 

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Managing debt during inflation 

Because of the negative impact inflation has on debt, it’s important to be extra diligent with your money. Here are some tips for managing debt during periods of high inflation: 

1. Make consistent on-time payments 

Pay all your bills (including your mortgage, rent, car loan, personal loan, student loans, and credit cards) on time, every time. A single missed payment can hurt your credit score and set you up for higher interest rates down the road. 

2. Lower your interest rates 

Do your best to reduce your interest rates whenever you have the option. The best way to do this is by improving your credit score. You may also lock in lower rates if you shop around and compare offers. 

You can also lower interest rates on your current debts by negotiating with the lender or company that owns your debt. While they aren’t required to lower your rates, it never hurts to ask! 

3. 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 their autopay system. 

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Other ways to combat inflation 

In addition to the methods listed above, here are a few other strategies to fight inflation: 

4. 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. 

If you created your budget before inflation rose, you should do your best to stick to it. That could mean shopping at discount grocery stores and secondhand outlets instead of buying new and name-brand goods. 

5. Find ways to cut costs 

Take a close look at your monthly bills and expenses and 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. 

6. 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. 

7. Invest 

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. 

8. Pay off smaller debts 

Another great way to manage your debt during inflation is to pay off smaller ones. Also known as the debt snowball method, paying off smaller debts decreases your total overall debt, makes it easier to manage your debts, and helps you build momentum to pay off your other debts. 

9. Talk to a credit counselor 

It can also be beneficial to talk to a nonprofit credit counselor if you’re having trouble managing your debt. Credit counselors can help you organize your finances and properly manage your money if you’re struggling with inflation and debt. 

10. Increase your income 

If you’ve stretched your budget to the max and simply don’t have enough money to make ends meet with your current income, consider finding ways to increase it. While investing your money is a good way to increase income down the road, that doesn’t solve your problems today. 

Instead, consider picking up a part-time job, extra hours at work, or a side hustle. There are plenty of great jobs you can do on the side, either remotely or in your off hours. Freelance writing, web design, delivering groceries, and voiceover work are just a few of the most common. 

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Get extra support from Advance America 

For those times when you need extra funds, Advance America is here to help. We offer a variety of personal loan options to help you stay on top of your expenses. 

Managing debt during inflation can seem daunting, but with the right approach, you can protect yourself from rising costs and make your money work for you.