Getting your spending right is more important than ever.

Important points

• In a high-inflation environment, things cost more and your money is worth less.
• If you keep most of your money in cash, you lose money.
• Pay off variable-rate high-interest debt and cut back on expenses so your money goes further.

The average American is paying nearly $4,100 more for necessities and gas this year. According to the latest data from the Department of Labor, consumer goods prices rose 8.3% yoy in April. From gas prices to the cost of groceries, the dollar isn’t going as far as it used to. Here are three money mistakes to avoid in times of high inflation.

1. Don’t keep your money in cash

The nationwide average savings rate is currently 0.07%. With inflation at 8.3%, the real value of your money actually falls by 8.23% every 12 months. Not only do bank accounts pay very little interest, but keeping most of your money in cash means you are losing money. You should hold your spending in your emergency savings account for three to six months, but anything beyond that could leave you needlessly losing money to inflation.

Investing in stocks is one of the best ways to keep up with inflation. Stocks can be volatile, but over the long term, the S&P 500 has outperformed inflation. The stock market is down almost 15% year-to-date on economic conditions and the Fed raising interest rates. But dollar cost average and consistent investing can help you reach your financial goals.

The 10 best days in the stock market over the past 20 years have come after major declines such as the 2008 financial crisis and the outbreak of Covid. If you had invested $10,000 in the S&P 500 on January 1, 2002, you would have $61,685 by December 31, 2021. If you missed the top 10 days in that period, you would have $28,260, down over 50%. In comparison, $10,000 in a savings account averaging 0.15% per year would be just $10,152. The key is to build your investment portfolio based on your risk profile and investment goals.

2. Not repaying variable debts

To cool inflation, the Fed raises interest rates to curb demand. You should focus on paying off variable debt like credit cards, lines of credit, and other debt that is directly affected by higher interest rates. The average credit card rate is currently 16.59%, up 44 basis points from this time last year. The interest rate for those with subprime credit ranges from 22% and above.

The difference between a 15% APR and a 20% APR can be thousands of dollars in interest. Focus on paying off your high-interest debt during periods of high inflation. If you have a lot of debt, you can roll your high-interest debt to a lower APR, get a debt consolidation loan, or ask your credit card issuer to lower your interest rates. Keep checking your variable rates for the latest changes.

3. Overspending

When prices go up, your money doesn’t go that far. Keep a budget to reduce your expenses. Certain categories have increased more than others, so you may need to update your budgeting per category. Gasoline prices are over 50% higher than 12 months ago, groceries are up 9.4%, used vehicles are up 22.7% and clothing is up 5.4%.

When necessities start costing more, you should review your spending to keep your costs down. Cancel unwanted subscriptions, eat out less often, and look for ways to save on gas. Cutting back on your expenses can help offset higher costs. Until prices return to normal, your money is worth less. Saving more can help you be better prepared if high inflation continues to be a problem.