Inflation isn’t going away. Consumers continue to feel the pinch at both the gas station and the grocery store. According to the latest numbers, consumer spending increased by 0.6% from August to September 2022, but household income only grew by 0.4%.
This increase means many Americans are dipping into their hard-earned savings to cover their regular expenses. Sound familiar? If so, here’s how to protect against inflation until the economy stabilizes.
What Is Inflation?
In general terms, inflation refers to rising consumer prices over time. This is actually part of the normal economic cycle. Problems come when inflation outpaces consumer wages.
During the past year, for example, inflation rates reached a 40-year high after climbing to a rate of 9.1%. As a result, the American dollar has less purchasing power than before, which is why it’s harder to stretch your paycheck to cover the cost of things like groceries, fuel, and household utilities.
While declining gas prices show some signs of relief, many economists are unsure that inflation rates will normalize until 2023 or even 2024. Now, more than ever, you’ll need a strategy for how to counter inflation and protect your budget.
How to Protect Against Inflation: 8 Strategies
Wondering how to counter inflation? While you can’t do anything about rising prices, you can still take steps to protect your savings and even your investments. Here are eight strategies to help you learn how to protect against inflation.
1. Adjust Your Budget
If high prices impact you or your family, it might be time to reexamine your monthly budget. In all likelihood, there are discretionary items you spend money on that could be trimmed to save you money.
For example, try to take your own coffee or lunch to work to fight the temptation to swing through a drive-thru. Alternatively, you might drop some of your streaming services to focus on only one entertainment platform.
Admittedly, this can be tough. If you’re having trouble cutting yourself off from your favorite indulgences, try to make it a game. Cut out just one purchase in your first week, then try to cut out two in your next week, and so on.
2. Look for Ways to Save
Become a bargain shopper. Buying store-brand cereal or other items can save you money you might otherwise spend on expensive brand names. This can help you stretch your paycheck at the grocery store. Many stores offer weekly specials, so you can always plan your menu around the sale prices at your local grocery store.
What about the fees for consumer banking or your monthly cell phone bills? Shop around. You may find a better deal at another financial institution or provider.
For instance, some cell phone companies or cable providers offer introductory rates to new customers. Switching can help you save, or your current provider might be willing to give you a discount to retain your business.
3. Build Your Emergency Fund
Ideally, you should have a fund that can cover three to six months’ worth of expenses. This means that if you see a sudden jump in your expenses due to inflation, protect your savings by dipping into your emergency fund and not your main savings account.
It’s okay if you don’t have a ton of cash to devote to this emergency fund. But setting aside just $50 per week can help you create a fund that will offer a cushion for unexpected expenses or if you should lose your job.
4. Move Money into a High-Yield Savings Account
During a period of high inflation, protect your savings by moving it into a high-yield savings account. Even if the interest rate doesn’t match current rates of inflation, most high-yield savings accounts offer better protection than a standard savings account.
Remember that inflation reduces the spending power of your cash. That’s why it’s important to keep your money in a savings account that preserves its value.
5. Purchase Treasury Bonds
For maximum purchasing power, bond rates are keyed to the rate of inflation. This makes savings bonds an ideal choice for your near-term savings, though they can also be integrated into your long-term savings plan. You can purchase a bond through the U.S. Treasury, including:
- Series I Savings Bonds
- Treasury Inflation-Protected Securities (TIPS)
The latter is a particularly attractive option, as TIPS are keyed to current rates of inflation. As consumer prices rise, TIPS adjust in price to preserve their value.
6. Invest in Inflation-Resistant Stocks
Don’t just go into a holding pattern during an economic downturn. You can continue to invest regardless of how the economy as a whole is faring. But that doesn’t mean that now’s the time to invest in a lot of high-risk startups.
Instead, try to focus on companies that have historically shown resistance to inflation. These companies usually include consumer staples stocks — companies that manufacture items that Americans buy no matter what.
Additionally, look for companies in fields such as:
- Healthcare companies
- Telecommunications
- Energy companies and utilities
- Financial institutions
- Real estate companies
- Insurance providers
If there’s a silver lining to the current economy, it’s that investors can snag shares of high-performing companies at a significant discount. A period of inflation may be a great time to invest in buy-and-hold stocks and reap the profits once the economy rebounds.
7. Diversify Your Investments
Every investment strategy is improved through diversification. At a minimum, this means selecting stocks for your portfolio that represent diverse companies and industries. This is especially important during a period of economic instability.
If you put all of your investments in, say, the tech sector, you stand to lose a lot more if these industries are hit hard by the current economy. Spreading out your investments helps mitigate the impact if one company/industry is affected more than another.
You can also diversify your portfolio by investing in the following:
- International Stocks: These companies aren’t impacted by downturns in the American economy
- Bonds: To protect your purchasing power, bonds can be a great short or long-term investment
- Short-Term Savings: Certificates of Deposit (CDs) offer modest short-term gains
Each of these options offers varying rates of returns, but they can be another way to spread out your investments so that you’re not investing in only one type of economic asset. If the American stock market should crash, you’ll still have investments in international stocks or savings bonds.
8. Explore Alternative Investments
Some investors may choose to avoid traditional financial vehicles altogether. You can invest in tangible assets such as:
- Real estate
- Commodities (agricultural products, metals, crude oil, natural gas)
- Precious metals
- Valuable collectibles (art, antiques, etc.)
Keep in mind that none of these options is fully immune to inflation. However, these tangible assets can increase the diversity of your investment portfolio and guard against high rates of inflation.
Even if you don’t have money to purchase real estate on your own, you can invest in a real estate investment trust (REIT). A public REIT can be purchased more readily and will increase your diversification like any real estate investment.
Navigate Any Economic Terrain
With the right strategy, no level of inflation can prevent you from achieving financial success.
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