Shrewd Savings: How to Avoid Losing Money to Inflation

How to Avoid Losing Money to Inflation

In normal economic conditions, inflation tends to increase prices gradually as consumer demand for goods grows. But today’s economic conditions aren’t normal. Higher inflation is triggered when external forces limit or alter supply of goods, which is exactly what happened in recent years due to social, political, and economic instability across the globe.

As prices go up, your buying power goes down—and although the amount of money in your bank account doesn’t actually change, it doesn’t stretch as far. So, how can you stay financially stable during periods of inflation? Here are a few tips.

1. Make Cash a Lifeline in Tough Times

First, let’s address a common fear. If your cash is just sitting in savings, does that mean it’s dwindling? In many cases, the interest rate on your typical checking account won’t keep pace with rising inflation, but there are high-yield savings accounts and certificates of deposit (CDs) that may offer returns high enough to help manage risk during periods of high inflation. This is especially true if you deposit your money with a credit union, which will often offer better rates than a for-profit financial institution.

2. Consider Securities Such as TIPS

Similar to a high-yield savings account, short-term bonds allow you to conserve some of your cash while still having easy access to it, and they’re more resilient than long-term bonds should inflation cause high interest rates.

But there are other bonds worth considering. Inflation-protected securities can protect against inflation, and the aptly-named Treasury Inflation-Protected Securities (TIPS) is a government bond that’s indexed to inflation. That means the interest rate they pay fluctuates with inflation, making them a great hedge for ordinary investors.

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How to save money during inflation

3. Don’t Overthink Stock Investments

Generally, stock returns tend to outpace the inflation rate. So if your friends are telling you that you need to rethink your entire portfolio and go all-in on high-risk, high-reward investments, you might want to slow down, think carefully, and not rush your decisions. If you have a diversified portfolio that’s been serving you well so far, chances are it will continue to do so.

4. Calculate Your Risk Tolerance

If you have a bigger appetite for risk, you may be wondering what sorts of commodities you might want to put your money into. For instance, today’s modern equivalent to buying precious metals in physical form is investing in exchange-traded funds (ETFs), but it’s worth noting that even gold tends to be a long-term investment. It can perform well on a timeline of decades, but may not do you much good over a few years of higher-than-normal inflation.

While the prices of other raw materials see their prices rise in response to inflation and may provide a viable hedge, the risks that come with unpredictable supply and demand may be more than the average investor would prefer to take on. During periods of market volatility, it may be best to stay inside your comfort zone. An IRA Money Market Account or IRA Certificate is often a low-risk alternative for those looking to play it safer while still earning on investments over time.

5. Make Your Safest Bet with Budgets and Bargains

When in doubt, the best action you can take during difficult periods of inflation is to double down on financial wellness and responsibility. Plan your expenses, focus on essentials, reduce discretionary spending, and look for discounts, coupons, and sales. These are guaranteed ways of saving your money at a time when everything else can feel like guesswork.

Remember: This Will Pass

There will always be inflation. But being proactive about growing your savings can help keep you financially stable. And our team here at Citadel is happy to help.

Connect with us to build or review your plan.