How to Keep Savings on Track Despite Inflation
If you’ve noticed that your grocery bill has increased despite purchasing the same amount of food, or the flight you’re looking to book for your annual vacation is more expensive than it was last year, you’re witnessing the outcomes of the country’s latest inflation surge.
As the Federal Reserve continues to raise interest rates to defeat inflation, fears of a full-blown recession are growing.
So, what can you do now to protect your nest-egg money from a “looming” recession?
This article looks at some options for protecting your savings from inflation.
But First, What’s Inflation?
In a nutshell, inflation is the increase in prices of everyday commodities and the resultant devaluing of the Dollar.
The current American inflation has excessively affected the price of gas and consumer goods. While the rise in the cost of basic amenities continues, the more painful part for consumers is not knowing exactly how long inflation will last or just how to react financially.
Inflation can turn positive returns into negative ones. Consider the prevailing US inflation rate of 8.2 percent, while most American banks offer less than 1 percent APR.
This disparity between inflation and returns decreases your future purchasing power and destroys your long-term savings.
How to Keep Savings on Track Despite Inflation
Inflation is likely to remain high, so changing the way you handle your finances can help protect the value of your cash.
Here are some ways to keep savings on track during inflation:
- Find Ways to Keep Your Expenses Low
Rapidly rising prices can be a reality check for millions of Americans who falter with money management.
Inflation is a silent budget killer. For the everyday consumer, the increased prices may mean reducing any splurge spending to avoid a big hit to your bank account.
If you haven’t reviewed your budget in a minute, now may be a good time.
- During the lockdown, you may have subscribed to multiple streaming services to keep you busy. But now that you’re back at work, you don’t use them anymore. Why not cancel them?
- If you find yourself eating out more often, it may be time to start carrying packed lunch to work. While at it, re-evaluate your food budget and add more cheap wholesome meals.
- Buy non-perishables in bulk if there’s a significant discount and you have storage space.
- Revisiting your insurance plans could also unlock substantial savings
- Instead of driving everywhere, car-pool or bike more often.
If you do all this and it still seems your expenses are not going down, downsize your housing to make significant savings.
- Look for High-Yield Interest Rates
If you’re an avid saver, you’re likely worried about your money losing value in the market.
Not being able to easily secure loans for big-ticket purchases during periods of high inflation can be frustrating, but to fight the effects of inflation on your cash, you can take advantage of competitive interest rates on bank accounts.
Bank account interest rates cannot always keep up with unpredictable inflationary spikes, but these accounts can help you hedge against inflation way better than keeping cash under a mattress or in a low-rate account.
According to the FDIC, the national average annual percentage yield on savings accounts is 0.21 percent, but several financial institutions offer much higher rates — some even 1.00 percent APY or more.
- Explore the Bond Market
If you have savings that you won’t need for a year or more, you may want to consider investing those funds in bonds.
Bonds are essentially like a certificate of deposit (CD): You put your money in one for a set period, and by the end of that period, you have a guaranteed rate of return that is hopefully higher than the current inflation rate — meaning your money won’t lose value.
Inflation is unlikely to go away, and the government will continually review inflation data and make appropriate adjustments to the federal funds rate.
However, future changes to global supply chains might free up inventory and affect lower prices for consumer goods, efficaciously slowing inflation.
Regardless of where inflation goes, it’s advisable to keep an eye on the above ways to optimize your savings.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.