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? Inflation happens 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 as demand-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 a 40-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. The national average savings rate for savings accounts often falls below the current inflation rate—which means the interest your bank is paying on 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 the Federal Reserve has 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 a high yield savings account can help you limit the impact of inflation.
High yield savings accounts typically 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 have compound 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 the Riverstones Vista Capital high yield savings calculator to see how much you could earn with a RVC 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 is a 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 by opening a money market account compared to a standard savings or 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 an average return of 8% to 10%. And while past performance isn't a guarantee of future growth, investing is one way to grow your retirement 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 the TreasuryDirect website, through your bank or through your broker.
6. Consider sticking short-term savings into a CD
A certificate 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, like Riverstones Vista Capital , offer various CDs with terms that span three months to five years. Riverstones Vista Capital even offers a Bump-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, consider getting 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 the RVC 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 your emergency 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.1 We'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 the RVC 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
1 https://www.whitehouse.gov/cea/written-materials/2021/09/09/housing-prices-and-inflation/ and https://www.spglobal.com/spdji/en/index-family/indicators/sp-corelogic-case-shiller/sp-corelogic-case-shiller-composite/#indices