You’ve noticed it lately, right? Everything seems more expensive. Groceries, gas, even a night out for dinner – your dollars just don’t stretch as far as they used to. Welcome to the world of inflation. As prices rise across the board, your hard-earned savings lose value just sitting in the bank. Don’t despair – you can take action to make your money work smarter. In this article, we’ll explore practical strategies to keep inflation from eating away at the nest egg you’ve worked so diligently to build. You’ll learn ways to optimize different types of accounts, dial in your asset allocation, and take advantage of opportunities in real estate. Arm yourself with knowledge and take purposeful steps, and you can empower your savings to not only withstand but thrive in inflationary conditions. Ready to fight back? Let’s dive in.
How Inflation Erodes Your Savings Over Time
Inflation is the slow and steady increase in prices over time. While the annual inflation rate may seem small, the effect compounds significantly over the long run. If your money isn’t growing at least as fast as inflation, your purchasing power is shrinking.
Your money loses value
Say the inflation rate is 3% annually. In the first year, a $100 bill will buy $97 worth of goods. In 5 years, it will only cost $86. After 10 years, your $100 is only worth $74. Over 30 years, its purchasing power drops to just $44. Your savings account balance may look the same, but what that money can buy is drastically less.
Interest rates often can’t keep up
The interest earned on savings accounts and CDs usually does not outpace inflation. At 3% inflation, you’d need an account paying over 3% interest just to break even. High-yield accounts may earn 1-2% at best. Your money is losing value in those accounts, even as the balance rises.
Plan for the long run
Don’t assume a bit of interest in your savings accounts means your money is keeping up with inflation. Look for investments like stocks, real estate, or TIPS that can generate higher returns over time. Make sure some of your money is working hard enough to overcome the steady, erosive effects of inflation. Your future self with thank you for the extra purchasing power.
Ways to Protect Your Money From Inflation
Diversify Your Investments
Don’t keep all your eggs in one basket. By investing in a mix of assets like stocks, bonds, real estate, or precious metals, you reduce the risk of losing money if one investment declines in value. As inflation rises, different assets may react differently. Diversification helps ensure your money maintains its buying power over time.
Consider Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) provide a fixed interest rate plus an adjustment for inflation. The principal value increases with inflation and decreases with deflation, as measured by the Consumer Price Index. TIPS are very low risk since they’re backed by the U.S. government. They may generate lower returns than stocks over the long run but can help stabilize your portfolio during inflationary periods.
Invest in Gold or Silver
Precious metals like gold and silver tend to hold their value during inflationary times. As the value of the dollar declines, the price of gold often rises. You can invest in gold or silver bullion, exchange-traded funds (ETFs), mining stocks, or futures and options. Precious metals provide portfolio diversification but can be volatile, so invest only a small portion of your assets.
Consider Annuities with Inflation Protection
Some annuities offer optional inflation protection, either annually or over a multi-year period. The payouts increase by a fixed percentage each year to help offset the loss of purchasing power. Inflation-protected annuities typically provide lower initial payouts than standard annuities but can be a good option if you want to generate lifetime income you can count on.
While inflation erodes the value of cash over time, the good news is there are several effective strategies you can use to help protect your money. Review your investment portfolio and savings accounts to make sure your hard-earned dollars retain their buying power for years to come.
Investing Strategies to Hedge Against Inflation
Diversify your portfolio
Don’t put all your eggs in one basket. Make sure your money is invested in a variety of assets like stocks, bonds, real estate, and precious metals. As inflation rises or falls, different investments may be impacted differently. By diversifying, you reduce risk and ensure at least some of your money maintains its value.
Consider inflation-protected securities
Treasury Inflation-Protected Securities (TIPS) provide a fixed interest rate plus an adjustment for inflation. The principal value increases with inflation and decreases with deflation, as measured by the Consumer Price Index. TIPS can be a good way to hedge against increased costs of living while still earning interest on your investment.
Invest in real assets
Real assets like real estate, precious metals, and commodities tend to hold their value during times of inflation. As the price of goods and services rises, the value of real assets also tends to rise.
Owning rental property or REITs (real estate investment trusts) is one way to invest in real estate. Gold and other precious metals are also popular inflation hedges. You can invest in gold directly or through exchange-traded funds (ETFs) that invest in gold mining companies.
Stay invested for the long run
While inflation reduces the purchasing power of your money in the short term, over longer periods the stock market has historically outpaced inflation. Staying invested in a well-diversified portfolio of stocks and bonds is one of the best ways to grow your money over the long run, even when prices are rising. Although it can be tempting to pull out of the market during periods of high inflation, doing so means potentially missing out on higher returns later on.
