Rosalind Evans
Despite the decrease in inflation rates, many remain concerned as they remain elevated.
The Bureau of Labor Statistics reveals a 5% inflation rate for the 12 months until March 2023. Although an improvement from the 8.5% inflation observed from March 2021 to March 2022, this is still considerably higher than the usual rate.
Thankfully, there are numerous strategies to tackle inflation, from cutting down on certain purchases to spending judiciously. Amid the inflationary peak of late 2022, the Consumer Financial Protection Bureau (CFPB) released a bulletin with top tips, such as buying food in bulk when it’s on sale, reducing energy usage, and price comparison for significant purchases.
Furthermore, our consulted experts recommended extra measures to safeguard your finances against inflation and bolster your savings. Here are some standout suggestions from financial advisors who assist their clients in creating wealth despite the upward cost trend.
1. Evaluate and modify your spending and saving
Susan Hirshman, Director of Wealth Management at Schwab Wealth Advisory, suggests those worried about inflation should examine how higher costs might affect their short-term and long-term objectives. They may also need to rearrange their plans to keep up with bills without draining their savings.
She recommends recalibrating savings and spending strategies to meet long-term objectives like funding a college education, repaying student loans, buying a home, or planning for retirement. For instance, older people dependent on a fixed income may need to cut back on travel due to escalating healthcare costs, while younger savers may need to reassign entertainment funds to cope with soaring childcare or rent costs. Hirshman stresses the importance of flexibility and reviewing discretionary spending and financial goals in times of rising rates.
2. Secure today’s higher rates
Rising interest rates, while making financing a home or a car costlier, can help you manage inflation when applied to savings and investments. Rates on high-yield savings accounts, certificates of deposit (CDs), and money market accounts are significantly higher than the previous year. CIT Bank, for instance, currently offers a 4.5% APY on the Savings Connect account, a rate considerably higher than many traditional banks.
Hirshman recommends considering Treasury Inflation-Protected Securities (TIPS) or Series I Savings Bonds (I-bonds) for your portfolio. Annuity payout rates, the highest in a decade, could also be worth considering. For instance, a single premium immediate annuity could help retirees who fear outliving their assets by providing a steady income to cover essential expenses.
3. Diversify your portfolio
Hirshman’s general advice is to create a diversified portfolio based on individual risk tolerance, time horizon, and long-term objectives. Focusing on quality is critical for equities and fixed income during high inflation. Hirshman advises staying invested across different asset classes to accommodate fluctuating market conditions.
4. Establish an emergency fund and invest the surplus
Brandon Goldstein of Prudential Financial stresses the importance of emergency funds, particularly during persistent inflation. He suggests a multi-layered approach to building emergency funds that prevent money from losing value over time. This involves scrutinizing your cash flow, determining monthly expenses, and setting aside three to six months in a savings account. Subsequently, additional savings can be invested in CDs, Series I Savings Bonds, or conservative fixed-income funds. Extra cash can be invested in stocks or mutual funds, which can be liquidated if necessary. Consulting a tax professional can be particularly useful at this stage.
5. Reconsider your borrowing
Given the higher rates applicable to credit cards and loans, borrowing should be avoided unless necessary. Consider alternatives to borrowing, such as paying cash or postponing purchases. Stick to your older vehicle a bit longer, or save up for a few years for home renovations instead of resorting to a home equity line of credit (HELOC).
At all costs, steer clear of credit card debt. According to the Fed, the average interest rate on credit card accounts currently accruing interest is 20.92%, meaning carrying credit card debt could exacerbate your inflation issues. If you are already in debt, consider opening a credit card with a promotional 0% APR on balance transfers. One such 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.
The current inflationary environment necessitates strategic financial planning. Whether recalibrating your savings and spending, diversifying your investment portfolio, or reconsidering your borrowing habits, these expert-approved strategies can help protect your finances against the rising cost of living. Inflation may be a fact of life, but it doesn’t have to derail your financial goals. Remember that flexibility and foresight are your greatest allies in navigating this economic challenge.
