5 Ways to Fight Inflation
You: Is inflation really as high as people say it is?
Me: Yup, pretty much.
Inflation is the highest it's been in 40 years, growing by 8.5% in April 2022 from the previous year alone.
That’s a big jump!
And Americans are feeling it as the price for everyday expenses like gas and groceries continue to climb. Combined with a down stock market and talk of a looming recession, the American economy hasn’t exactly been a walk in the park these days.
So yes, unfortunately, inflation is high — but that doesn't mean you should panic either. Instead, now is the time to look for ways you can fight inflation to protect your money and investments moving forward.
Need a few tips? No problem. Below are five ways you can fight inflation and protect your money against a possible recession.
But first, here’s a quick recap on interest rates and why they’re so important when talking about inflation.
The Fed has increased interest rates — so what?
Actually, the Federal Reserve — affectionally known as “the Fed” — changes what’s known as the Federal Funds Rate, which in turn impacts all other interest rates, like those on credit cards and personal loans.
This is the government's way of trying to slow inflation by increasing interest rates that make it less favorable for people to borrow money. Remember that when you’re talking about debt, higher interest rates cost you more money over time — it’s what you pay your lender or financial institution for letting you borrow the money in the first place.
So, if you see a credit card with a super high interest rate, that's a no-go. Mortgage with a super high interest rate? Might want to wait till they come back down.
The TLDR (too long, didn’t read): by increasing interest rates, the government makes it more expensive to borrow. The more expensive it is to borrow, the less likely people are to spend, which hopefully slows inflation.
So now we know two things:
Inflation is sky-high, and
Interest rates are coming up with it
Oh, and by the way, some say a recession is coming...
Spoiler alert: a recession is always coming because the market is cyclical, but no one knows when... so the best thing you can do is protect your money.
Here are five ways you can protect your money in the current economy:
Increase your emergency savings
Having an emergency fund is great advice on any day, but particular when the economy is looking pretty dicey. More than anything, your emergency fund is there to protect you from going into debt (or further debt) in the event of an emergency. In a world where the cost of every items and interest rates are rising, your emergency fund becomes that much more important.
If you don't yet have an emergency fund, start today and slowly work your way up to your first $500, then your first $1,000. Setting up an automatic transfer can make this process a bit easier, till ideally, you've saved 3-6 months’ worth of living expenses over time.
Need a system for your money that actually works?
You can learn the exact system I used to pay down $45k worth of debt in 3 years, double my income in 4, and buy my first home in 5. Click below to learn more.
2. Pay down existing debt
As interest rates are likely to increase in an effort to fight inflation, now is probably a good time to pay down any debt, particularly high-interest debt, in the event that interest rates continue to rise. This is particularly true if you have any variable interest rates on your debt, like a variable interest rate credit card. The concern here is not only that interest rates might increase, but also that if prices for things like groceries or gas continue to go up, your debt may be more difficult to pay off.
Related, if you can afford it, you might want to avoid taking on any new debt in the near future, particularly variable lines of credit. If you have to take on a new line of credit, go for a fixed rate. If you’re not sure whether you’re being offered a variable or fixed rate, ask your lender.
3. Stay calm and shop the sale
Inflation can make day-to-day living more difficult, sending the price of everyday items like gas and groceries soaring. Unfortunately, inflation also impacts the stock market, which companies have to deal with too — and as the stock market slows or goes down, you may be tempted to sell off some of your investments.
Try to resist!
While it can be hard to see the value of your investments go down, remind yourself that you don't actually lose any money on an investment until you sell it at a loss (called a realized loss). Further, if selling at a gain because you’re trying to time the market or worried your stocks might lose additional value, you’ll still face capital gains tax on any realized gains or profit you’d make on your investments.
If you can stay calm, and hold onto your investment, you give the market the time it needs to recover and your for investments to grow. Keep in mind that even in a bear market (when the market falls, on average, at least 20% from its high), the stock market as a whole usually recovers in 1-2 years.
Lastly, one of the few good things about a down stock market is that the price of shares in stocks and funds are low — and who doesn’t love a good sale? If you have sufficient emergency funds and a system where you consistently invest a certain amount every month, stick with it to take advantage of a lower cost basis for your go-to investments.
4. Consider some more predictable investments
The market has taken quite a hit lately, leaving many investors at the seat of their pants. Since January 1, 2022, the S&P500 has fallen nearly 20%, with the NASDAQ already past the 22% mark.
That's the kind of dip that hurts, even if the market as a whole will eventually recover.
Unfortunately I can't say the same for individual stocks and bonds across the board. It’s part of what makes the stock market risky, which is why you might consider a more predictable investment these days (or any day, depending on your risk tolerance) like the U.S. Treasury Series I bond.
Note: This article is for informational purposes only, and should not be construed as specific investment advice.
While savings bonds are normally glanced over because of their low interest rates, the Series I bond can be a great option for investors looking for a fixed return, currently offering a record 9.62% return (!!) for 6 months if purchased between now and November 2022. That’s an incredible fixed return on an investment! That’s because it beats the historical, annualized return of the stock market in any 30-year period in U.S. history, which is generally around 7%.
If you’re curious to learn more, I wrote all about the I bond when the news was first going viral earlier this year. The interest rate at that time was 7.12%. Read it and learn how to buy I bonds here.
5. Take advantage of rising high-yield savings accounts
My last recommendation to help fight inflation and protect your money is making comeback!
Just like 90s jeans, but better for your bank account…
I used to write about the benefits of high-yield savings accounts all the time back in 2019; then all the savings interest rates dropped — again, and again, and again. Fortunately, while it won’t make up for crazy gas prices, rising interest rates also impact savings accounts (but in a good way).
For example, my savings account with Ally Bank has increased its rate 2x in the past month alone.
If you have a dedicated savings account, and it’s not high-yield, you’re probably making only 0.05% interest, which might as well be $0 on that account. Switching to a high-yield account with rates currently around 0.75-1.25% can get you anywhere between 15-25x that amount! If your money is going to be sitting in an account for an emergency or another goal, it might as well be working harder for you.
Want to learn more about high-yield savings accounts? Check out NerdWallet’s top recommendations and rates here.
Questions? Want more tips on how to fight inflation? Drop me a comment below!
