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While inflation numbers are trending lower, they’re still at a rate that has many of us alarmed.
The Bureau of Labor Statistics reports that overall inflation was at 5% during the 12-month period leading up to March 2023. That’s better than the 8.5% percent inflation we saw from March 2021 to March 2022, but it’s still well above the norm.
Fortunately, there are myriad ways to deal with inflation, whether consumers opt to stop some types of purchases altogether or just spend less where they can. In the midst of some of the worst inflation we saw in late 2022, the Consumer Financial Protection Bureau (CFPB) even issued a bulletin with their best tips. For example, the CFPB made suggestions like stocking your freezer when food is on sale, reducing energy consumption and price-shopping for major purchases before you buy.
That said, experts we spoke to suggested additional steps you can take to “inflation-proof” your finances, or at least help your savings keep up. Here are some of the best tips we received from financial advisors who are busy helping their own clients build wealth despite rising costs across the board.
Analyze and adjust your spending and saving
Susan Hirshman, who serves as director of wealth management at Schwab Wealth Advisory, says consumers worried about inflation need to consider how increased costs might impact their short-term and long-term goals. They might also need to adjust their plans in a way that helps them keep up with bills without depleting their savings.
“When accounting for inflation and increased living expenses, you may need to recalibrate your savings and spending strategy in order to reach long-term goals such as paying for college, paying off student loans, buying a home or saving for retirement,” said Hirshman.
As an example, older individuals who rely on fixed income may be hit hard by rising healthcare costs and have to reduce travel expenses as a result. Meanwhile, younger savers may need to consider reallocating funds for entertainment so they can afford the rising costs of childcare or rent.
“Flexibility is key, and it’s important to take a step back to review your discretionary spending and short-term and long-term financial goals during periods of rising rates.”
Lock in today’s higher rates
While rising interest rates have made it more expensive to finance a home or a car, locking in higher rates for savings and investments (when applicable) can help you deal with inflation or at least keep up.
For example, interest rates on the best high-yield savings accounts, certificates of deposit (CDs) and even money market accounts are dramatically higher than they were just a year ago. For example, CIT Bank is currently offering a 4.5% APY on the CIT Bank Savings Connect account. This is significantly higher than the rates you’ll find at many traditional banks.
Hirshman also says you could also consider incorporating Treasury Inflation-Protected Securities (TIPS) or Series I Savings Bonds (I-bonds) into your portfolio, both of which offer a rate of return that adjusts for inflation. However, she adds that while TIPS can help protect investors against inflation over the long term, they aren’t a hedge against inflation in the short term since “price changes may more than offset the principal adjustment over shorter periods of time.”
In the same vein, you might consider branching out into types of investments that let you lock in rates if you haven’t done so in the past. Hirshman says that, specifically, annuity payout rates are the highest they’ve been in a decade.
As an example, the advisor says a single premium immediate annuity, also known as a fixed immediate annuity, could be useful for retirees in good health who are concerned about outliving their assets. In this case, a fixed-rate annuity can provide a predictable income to cover a portion of essential expenses.
Diversify your portfolio
Hirshman says her general advice for clients is the same in any market environment.
“Build a diversified portfolio based on your individual risk tolerance, time horizon and long-term goals,” she said.
However, the advisor adds that building a diversified portfolio doesn’t always mean you buy and hold. Your asset allocation may stay the same, but the underlying holdings may need to be adjusted over time.
During times of high inflation, Hirshman says that focusing on quality is important for both equities and fixed income. While the advisor doesn’t advise trying to time the market, she does suggest staying invested across different asset classes over time to account for changing market conditions.
Related: Looking to build wealth? Here are some of the best ways to invest your money
Build an emergency fund and invest the rest
Financial planner Brandon Goldstein of Prudential Financial says emergency funds are always the starting place of any financial “build,” especially in a time of persistent inflation. The advisor also recommends a multi-pronged approach to saving up emergency funds that makes sure money isn’t left to linger where it’s losing value year after year.
Goldstein says the first tier of his advice is reviewing your cash flow with a budget sheet, determining what your monthly expenses are and setting aside three to six months of expenses in a savings account.
“While you’re not getting crazy rates on these accounts, unless you explore some online high-yield savings accounts, it’s important to have these funds readily accessible, whether it be for an emergency or an upcoming major purchase,” he said.
After that, you can put additional money you have saved into options like certificates of deposit (CDs), Series I Savings Bonds or even conservative fixed-income funds.
Next, consider investing additional cash into stocks or mutual funds that can be liquidated in the event you need cash available without significant penalties, if any at all. Goldstein adds that this is where speaking with a tax professional becomes especially important.
Either way, he says investing the excess funds beyond your initial emergency fund can give you a potentially higher investment return in exchange for more risk.
Rethink your borrowing
Finally, you should avoid borrowing money unless you absolutely have to. After all, today’s higher rates also apply to credit cards and loans, meaning credit card debt, mortgage debt, home equity debt and other financial liabilities now come with higher interest costs than they did a few years ago.
Instead of borrowing money, you should look for ways to pay cash or make do with whatever you have that you’re wanting to replace. Drive your older paid-off car a little longer, or spend a few years saving up cash for a home renovation instead of taking out a home equity line of credit (HELOC).
And no matter what, you should strive to avoid credit card debt. The average interest rate of credit card accounts currently amassing interest is 20.92% according to the Fed, so carrying credit card debt can make your inflation problems a whole lot worse.
If you’re already in credit card debt, consider opening a credit card that offers a promotional 0% APR on balance transfers to save on interest charges. These cards effectively move debt from your existing credit card to a new account and give you a 0% APR for a set amount of time.
One good option is the U.S. Bank Visa® Platinum Card which offers a 0% APR on purchases and balance transfers for the first 18 billing cycles. This rate rises to a variable 19.49% to 29.49% APR after the introductory period ends. Balance transfers must be made within 60 days of account opening to qualify for the promotional APR.
Looking for a new savings account? Read our guide to the best high-yield savings accounts.
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