How to Save During Inflation

Key Takeaways

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Inflation

When prices are going up which decreases the buying power of your dollar
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Series I Savings Bonds

Government backed savings bond offering higher than average interest rates with limitations
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Mooch

Our budgeting app that pays you rewards

Wondering what exactly inflation is, or why it happens?

Inflation means that prices are going up which decreases the buying power of your dollar. Simply put, if avocados suddenly cost $5 instead of $3, your original $3 is going to buy you significantly less avocado. It is usually caused by two things: an increase in cost to produce goods and services, or demand being significantly higher than supply. Also called "the worst tax," inflation is silent but deadly for your savings.

Keeping your money in a bank may seem like a safer bet because you earn interest, but the interest rates mayn’t be high enough to counterbalance the effects of inflation. Another safety fallacy is that if you are consistent in putting money away, your savings will be protected. This is not always true, because if your money is worth less, you’ll have to increase the amount of money you’re putting away in order to stay on track for savings goals.

What’s the worst thing you can do for your savings when faced with inflation?

Keep it in cash or any kind of checking account. Keeping money under your bed or easily accessible may *feel* safer, but the only safe guarantee for cash is that it will be worth less in the future. While putting your funds into a high-yield savings account, CD or money market account may be a safer bet, the average interest rate of such accounts is around three percent. When you factor in inflation, you'll be down about four percent. This is less volatile than the stock market, but still brings a certain degree of risk.


Why is inflation such a buzz word all of the sudden?

Historically, the long-term annual average rate of inflation in the United States was between 2-4 percent. Today, at the beginning of 2022, inflation is approaching 7 percent. Such a high rate has not been observed in over 40 years. For an easy way to calculate just how much inflation can erode your money, check out NerdWallet’s Inflation Calculator.

Smart money move: refinance your home

Take advantage of the facts that mortgage rates remain low. Refinancing your home’s mortgage could save you hundreds of dollars per month on mortgage payments. That money would definitely be better spent somewhere else (like on groceries or gas). Alternatively, if you’ve been looking to buy property, now is the time. Inflation favors buyers over renters, as landlords may hike up rent prices to reflect rising prices.

Grocery Tips

Buy less meat. Meat prices have skyrocketed during the pandemic, according to recent consumer prices indexes by the U.S. Bureau of Labor Statistics. Beef prices have increased 20.9 percent during the last year and chicken increased 9.2 percent. Turkey and other uncooked poultry prices have only increased by about 4.6 percent, so consider cooking with more poultry and vegetables to lower the cost of your grocery bill. Check out other grocery items on the consumer price index that haven't increased in price so much and challenge yourself to some new recipes with new (and cheaper) ingredients.


What are my other options?

Investments

  • Series I savings bonds and Treasury Inflation-Protected Securities (TIPS). Series I bonds currently offer an interest rate of over 7 percent through April of this year. Two caveats for this type of bonds: you're limited to purchasing up to $10,000 worth and you cannot sell the bonds for at least 12 months.
  • We do not recommend long-term bonds. Short-term or intermediate-term bonds bonds are more resilient when you consider that inflation tends to cause higher interest rates. Additionally, you can always reinvest short-term bonds at higher interest rates as they mature.
  • Stocks may be a better long term investment, if you pick the right ones. Do your research and buy dips -- short term stock losses during periods of inflation can turn into long term gains. We especially recommend stocks that pay dividends that can be reinvested or saved. We also recommend commodity resource stocks of companies that have products with major prices increases during inflation, such as meat, grains or metals.
  • Invest in yourself! Learn a new skill, take an online course, or get some new books to read. Investing in yourself increases your future earning power and can help grow your career (and of course, your salary).

Real estate

  • If you been preparing to buy a home, now is the time. Inflation is no friend to renters, and you may be able to negotiate a better mortgage during this time. But no, this does not mean you should try to flip properties to make short-term gains. Flipping properties during periods of inflation is a dangerous game to play, as cost of labor and materials is rising with inflation. You should consider investing in real estate to be more of a long-term game, where housing prices increase slowly year after year.
  • Another great option for people not ready to buy property is investing in a real estate investment trust (REIT).


Keep this in mind...

Nobody is totally immune to inflation. The best tool in your arsenal is having a budget and sticking to it. Be mindful of your spending habits and where you may be overspending. Remember that inflation won't last forever, you got this!

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