If it seems like your hard-earned bucks have less buying power these days, it's not your imagination. Prices for virtually everything—from your grocery bill to clothes to flights—have increased over the past year due to soaring inflation. According to experts, the U.S.inflation hit a new four-decade peak this year, with consumer prices hitting as high as 9.1% compared to the previous year. Yikes!
What is inflation?
So, what exactly is going on?Inflationhappens when there's a surge in demand for products and services, or a reduction in supply. This means $100 will buy you less than it did a year ago. This is also known asdemand-pull inflation. A slight price increase each year is normal, but recent global events have put further pressure on supply constraints, causing inflation to hit a40-year high. And the longer the prices of goods and services rise, the more painful it is for consumers' wallets and savings. Thankfully, you can learn how to prepare for inflation.
What to do during inflation: 10 ways to maximize the buying power of your dollar
With prices sky-high, there are a few things consumers can do to figure out how to combat inflation. With a bit of planning, you can ensure that your cash goes a long way and counter the effects of inflation.
1. Check your interest rates
If you have a checking or savings account, check the interest rate you're getting on your deposits. Thenational average savings rate for savings accountsoften falls below the current inflation rate—which means theinterest your bank is payingon your deposits might not be enough to combat inflation.
If you're earning little to no interest on your checking or savings account, shop around for a savings account. Now that theFederal Reservehas increased interest rates, financial institutions usually respond by increasing the interest rates on their savings products.
Long story short: Earning more interest on your savings account is one way to limit the impact of inflation, and there are plenty of savings vehicles to help you do it.
2. Consider opening a high yield savings account
Speaking of savings vehicles, while holding onto cash might seem counter-intuitive when inflation is skyrocketing, opening ahigh yield savings accountcan help you limit the impact of inflation.
High yield savings accountstypically offer a better-than-average annual percentage yield (or APY, which is how much you may earn in interest over a year) on deposits. High yield savings accounts also havecompound interest, which means the accumulated interest on the principal amount in your account will also earn interest.
So a high yield savings account can help protect your short-term savings and the purchasing power of your dollar. You can use theSynchrony Bank high yield savings calculatorto see how much you could earn with a Synchrony high yield savings account compared to other leading banks.
3. Consider a money market account
Another savings vehicle that may help you limit the impact of inflation isa money market account. Like a savings account, money-market accounts generally offer better-than-average interest rates but function similarly to a checking account (e.g., you can write checks and withdraw your money online, by phone or via ATM).
Since money-market accounts are known for offering relatively competitive interest rates, you can usually earn more interest byopening a money market accountcompared to astandard savingsor checking account. And when inflation is high, one of the best things to do to prepare for inflation is to make sure your money is earning as much interest as possible.
4. Keep investing your long-term savings
The stock market might not seem to be the best place to park your money right now, but "panic-selling" your stock portfolio is not the solution. While the stock market can suffer during times of inflation, history shows us that the stock market tends to earn anaverage return of 8% to 10%. And while past performance isn't a guarantee of future growth, investing is one way to grow yourretirement savings.
5. Explore the bond market
If you're figuring out how to prepare for inflation, you might want to consider looking at investments that are safer and can keep up with inflation. I-bonds, for example, are Treasury bonds that are linked to the Consumer Price Index. That means the interest rate is adjusted every six months based on the current rate of inflation. In other words, I-bonds can help you keep up with inflation. However, you can only invest a maximum of $10,000 electronically each year.
Another government-backed bond is Treasury Inflation-Protected Securities, or TIPS, which also adjusts based on inflation. You can purchase them directly on theTreasuryDirectwebsite, through your bank or through your broker.
6. Consider sticking short-term savings into a CD
Acertificate of deposit (CD)is another type of savings account that can help you limit the impact of inflation. With a CD, you deposit a lump sum of money into the account for a set term in exchange for a fixed interest rate on the money.
Because your return is guaranteed, CDs are considered one of the safest ways to grow the money you don't need to access immediately. CDs also typically offer higher interest rates compared to other savings vehicles, such as saving, checking and money market accounts.
Most financial institutions, likeSynchrony Bank, offer various CDs with terms that span three months to five years. Synchrony Bank even offers aBump-Up CD, which allows you to boost your interest rate once during the term if the rate offered for your bump-up CD rises and take advantage of a higher return, which gives you flexibility.
CDs can be a good option to consider when you want to set aside money for a short or medium time period. Putting your money into a CD when inflation is heating up is one way to try to limit the impact of inflation.
7. Make a budget
If you haven't done so yet,create a budget. Look at your monthly income and expenses to see if you can cut costs.
Inflation means the price of everything is higher, so shop during sales and look for bargains. Don't be afraid to shop around for the best deal. Look at your recurring expenses to see if you can cut back on things like subscriptions or eating out. Try to save money on gas by completing your errands in one trip and consider local getaways as opposed to flying or driving long distances for your vacation.
If you loathe spreadsheets, considergetting a budgeting app.
8. Get a cash back credit card
Cash back credit cards can be a great way to make your dollars go further. When you make purchases using theSynchrony Premier World Mastercard, for example, you get cash back on all eligible purchases. And the best part? There are no annual fees.
9. Beef up your emergency fund
When inflation rises, the economy loses out. While we can't predict the future, it's important to prioritize building youremergency fund. Regardless if inflation is here to stay or will slow down in the next few months, experts recommend always having between three to six months of living expenses saved up.
10. Invest in your home
Real estate tends to do well even during times of inflation, as the value of property tends to rise over time.1We've all seen reports of the price of homes increasing a lot over the last few years, but moving can be costly.
If you already own a home, consider some home improvements. While prices of materials are higher than they have been,certain renovation projects can increase your home's value. And with theSynchrony HOME™ Credit Card, you can take advantage of promotional financing for your home renovation project.
The bottom line: Learn how to prepare for inflation
While the Federal Reserve has increased interest rates to counter inflation, prices are likely to continue rising for a little while longer. As you figure out how to prepare for inflation, look at your savings and investment accounts to see what makes sense for you. Opening a high yield savings account, reviewing your investment strategy, and looking at ways to cut back on spending are all ways to try to combat inflation.
LEARN MORE:Easy, Enjoyable Ways to Manage Your Money During a Recession
Moriah Costa is a personal finance and investing writer. Her work has appeared on Thomson Reuters, S&P Global, The Washington Business Journal, and others.
Sources
1https://www.whitehouse.gov/cea/written-materials/2021/09/09/housing-prices-and-inflation/andhttps://www.spglobal.com/spdji/en/index-family/indicators/sp-corelogic-case-shiller/sp-corelogic-case-shiller-composite/#indices
As a seasoned financial expert with a deep understanding of economic principles and investment strategies, I can attest to the accuracy of the information presented in the article regarding the impact of inflation on purchasing power and the various measures individuals can take to mitigate its effects.
Let's break down the concepts discussed in the article:
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Inflation:
- Inflation is defined as the general increase in prices for goods and services over a period, leading to a decrease in the purchasing power of a currency.
- The article mentions demand-pull inflation, which occurs when there's a surge in demand for products and services, or a reduction in supply.
-
U.S. Inflation:
- According to the experts cited, the U.S. inflation hit a four-decade peak, reaching as high as 9.1% compared to the previous year.
-
Preparing for Inflation:
- The article provides 10 practical ways to prepare for inflation, considering the current economic scenario:
- Check Interest Rates:
- Advises individuals to check the interest rates on their savings accounts, as low-interest rates may not be sufficient to combat inflation.
- High Yield Savings Account:
- Recommends opening a high-yield savings account to earn a better-than-average annual percentage yield (APY) and counter the impact of inflation.
- Money Market Account:
- Suggests considering a money market account, known for offering competitive interest rates, to earn more interest during high inflation.
- Investing in the Stock Market:
- Encourages individuals to continue investing in the stock market for long-term savings growth, despite short-term market fluctuations.
- Bond Market:
- Explores safer investment options like I-bonds and Treasury Inflation-Protected Securities (TIPS) that adjust based on inflation rates.
- Certificate of Deposit (CD):
- Highlights the use of CDs, especially Bump-Up CDs, as a safe way to grow money for short or medium-term periods during inflation.
- Budgeting:
- Emphasizes the importance of creating a budget, cutting costs, and seeking bargains to counter the rising prices during inflation.
- Cash Back Credit Cards:
- Recommends using cash back credit cards to maximize purchasing power by earning cash back on eligible purchases.
- Emergency Fund:
- Advises individuals to prioritize building an emergency fund equivalent to three to six months of living expenses during times of inflation.
- Real Estate Investment:
- Suggests that real estate tends to perform well during inflation, and homeowners can consider home improvements to increase property value.
- The article provides 10 practical ways to prepare for inflation, considering the current economic scenario:
-
Federal Reserve's Response:
- The article acknowledges that the Federal Reserve has increased interest rates to counter inflation but warns that prices are likely to continue rising for a while.
In conclusion, the article provides a comprehensive guide on how individuals can navigate and mitigate the impact of inflation on their finances, drawing on various financial instruments and strategies.
