When it comes to purchasing power, inflation means things cost more and your money becomes less valuable. When a period of high inflation hits, like now, you may want to consider changing the way you manage your finances to help protect the value of your cash.
“Inflation is a time for investors and savers to reassess their strategies,” said Walter Russell, chief executive of financial advisory firm Russell and Company.
Through the Federal Reserve, the government tries to combat inflation on a massive scale by raising the fed funds ratewhich is the interest rate that commercial banks use to borrow and lend money to each other.
When the cost of borrowing gets more expensive, higher interest rates trickle down to consumer banking products like loans and mortgages, making them more expensive. But higher interest rates can also apply to deposit accounts, which means banks start offering higher interest rates on checking, savings, and certificates of deposit.
No one knows what the future will bring, but by making changes to how you spend and where you keep your money, you may be able to weather times of inflation more easily.
Here are some ways to save during periods of inflation.
Look for high-yield interest rates
It can be frustrating not being able to get loans for large purchases as easily during periods of high inflation. Still, consumers can take advantage of higher interest rates on bank accounts to combat the effects of inflation on their cash. Bank account interest rates generally don’t fully exceed the rate of inflation, but these accounts can help protect against inflation much better than having cash at home or in a low-rate account.
The national average annual percentage yield for savings accounts is 0.06%, according to the Federal Deposit Insurance Corporation, but there are many financial institutions that offer much higher rates, some even 1.00% APY or more. To find these rates, you can search for high-yield or high-interest accounts and choose the bank that best suits your needs.
Find ways to keep costs down
If you haven’t reviewed your budget in a while, now might be a good time. During the pandemic, you may have signed up for various streaming services that you no longer use, or are spending more money dining out or paying for more convenience services now.
You can bike more often instead of driving everywhere, and you can reevaluate your food budget to add more healthy, affordable meals. For a bigger change, you could downsize your home to save even more money.
Consider investing or buying bonds for long-term savings
It’s a good idea to keep short-term cash, such as an emergency fund, accessible in a savings account, but if you have savings you don’t expect to need for a year or more, you might consider investing those funds or buying a Treasury bond.
“For someone who has a lot of cash on the sidelines, (investing) could help you not lose money,” Russell said. “More people might be willing to take more risk because they want a higher rate of return.”
Russell also recommends that consumers consider Treasury Direct Series I savings bonds, which can earn interest rates of more than 7% on up to $10,000 for a one-year term. These bonds are basically like a certificate of deposit: you put your money into one for a year, and at the end of the year, you have a guaranteed rate of return that hopefully stays higher than the current rate of inflation, so your money will not lose value.
The government will continue to review inflation data and make appropriate changes to the federal funds rate. However, there are other factors that may slow inflation in the coming year, such as changes in global supply chains that could free up inventory and lead to lower prices for goods. It doesn’t matter if inflation is up or down, however, it’s a good idea to keep an eye out for ways to optimize your savings.
This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Chanelle Bessette is a writer at NerdWallet.