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With rising interest rates and record-high inflation, here's how you can save (some) money
Select looks at two ways to save money in a high inflation and rising interest rate environment.
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In June, inflation rose to a whopping 9.1% from the previous year, the highest rate increase we've seen since 1981. It's also up 1.3% from the previous month.
As prices have remained consistently high — mostly due to factors such as the war in Ukraine, supply chain shortages and pent-up consumer demand during the ongoing Covid-19 pandemic — consumers are responding by changing their spending habits.
According to the Bureau of Economic Analysis, consumer spending only increased by 0.2% in June compared to the previous month, reflecting the smallest month-over-month rise in consumer spending we've seen in the past year.
Scaling back on your expenses is easier said than done, though, especially when the prices of most goods and services have increased substantially. If you're looking to stretch your paycheck a little further, here are two things you can do to save (some) money during these truly unprecedented times.
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Understand what you're spending money on
Most people are spending the majority of their income on essential expenses such as food, transportation, medical bills and housing. While cutting back on discretionary expenses such as happy hours or subscription services will save you a little in the short-term, you'll end up saving more by scaling back on some of those essentials.
It's likely difficult, if not impossible, to spend less money on housing, transportation and food, but you may want to think about spending less when it comes to each of those categories — consider downsizing your apartment to save on housing, carpooling to save on transportation or shopping at a cheaper grocery store to save on food expenses.
Since not all spending categories are equally feeling the effects of inflation, it's also worth thinking about which expenses are the most heavily impacted. The prices of gasoline, shelter and food experienced the largest hikes, for instance, with gas prices rising 11.2% and energy prices, more broadly, rising 7.5%.
While paring down spending in any of these categories may not be possible, recognizing which regular purchases have gotten more expensive and opting for cheaper alternatives can help you save money.
You can also earn rewards or cash back for those essentials that you have to purchase regardless. For instance you could earn 6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%) and 3% cash back at U.S. gas stations (no rewards cap) with the Blue Cash Preferred® Card from American Express.
Blue Cash Preferred® Card from American Express
6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at U.S. gas stations, 3% cash back on transit including taxis/rideshare, parking, tolls, trains, buses and more and 1% cash back on other purchases. Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit.
Earn a $250 statement credit after you spend $3,000 in purchases on your new card within the first 6 months.
$0 intro annual fee for the first year, then $95.
0% for 12 months on purchases from the date of account opening
18.99% to 29.99% variable
Balance transfer fee
Either $5 or 3% of the amount of each transfer, whichever is greater.
Foreign transaction fee
See rates and fees, terms apply.
Beware of credit card debt
While consumers got lucky with near-zero interest rates during the start of the pandemic, the Federal Reserve has sought to tamp down on inflation by increasing them. In June, the Fed announced its biggest rate hike since 1994, while another increase of the same amount — 75 basis points or 0.75%, — is expected to happen later this month.
When the Fed increases the interest rate, known as the federal funds rate, this indirectly increases the interest rate on other types of consumer debt such as credit cards, automobile loans and mortgages. According to Matt Schulz, chief credit analyst at LendingTree, that means consumers can expect to see higher APRs on their credit cards within one to two billing cycles after the Fed's rate hike announcement.
A recent study by LendingTree found that the average APR offered on new credit cards was a whopping 20.82%. Not paying your credit card balance in full and on time could add up quickly as you'll end up having to pay late fees in addition to the interest charges.
When it comes to tackling credit card debt, there are two popular ways to get it paid off: The snowball method and the avalanche method.
With the snowball method, individuals focus on paying off the smallest balances first, working their way up to the largest amounts. It's a good option for those who need to see a small victory to stay motivated.
The avalanche method, on the other hand, usually saves consumers more money in interest but can take longer to pay off your balances, since it involves consumers paying off their highest interest rate debt first before moving on to debt with lower rates.
Consumers trying to finance a big-ticket purchase or pay off current credit card debt should consider signing up for a 0% APR credit card, as some of them offer an introductory period, typically between 12 and 20 months, where cardholders won't have to pay any interest on new purchases or can transfer balance on a card with a high APR.
The Wells Fargo Reflect® Card, for instance, has a 0% introductory APR for 21 months from account opening on purchases and qualifying balance transfers; 17.99% to 29.99% variable thereafter. Balance transfers made within 120 days from account opening qualify for the intro rate, BT fee of 5%, min $5. Note that while this card offers no opportunities to earn rewards, no welcome bonus and no annual fee, it's a simple option for those who want to pay off a big balance in a short amount of time.
Wells Fargo Reflect® Card
0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 17.99% - 29.99% variable APR thereafter.
17.99% - 29.99% variable APR on purchases and balance transfers
Balance transfer fee
Balance transfers fee of 5%, min $5.
Foreign transaction fee
See rates and fees. Terms apply.
Another option is the Capital One SavorOne Cash Rewards Credit Card, which has a 0% introductory APR on purchases and balance transfers for 15 months, 19.74% - 29.74% thereafter. There is a 3% fee on balance transfers made within the first 15 months. This card has no annual fee and lets you earn 3% cash back on dining and entertainment purchases — as well as for eligible streaming services and shopping at grocery stores, excluding Walmart and Target — and 1% for all other purchases. This card also provides a one-time $200 cash bonus after you spend $1,000 on purchases within the first 3 months from account opening.
In order to qualify for a low APR on a credit card or a 0% APR card, you'll generally need a very good (740-799) or excellent (800-850) credit score. Note that while credit cards can still have high interest rates regardless of how good your credit score is, improving it can help save you money on the interest you're paying on any type of debt, whether a credit card or a mortgage.
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For rates and fees of the Blue Cash Preferred® Card from American Express, click here.