When it comes to purchasing power, inflation means things cost more and your money loses value. When a period of high inflation hits – like right now – you may want to consider changing the way you manage your finances to help protect the value of your money.
“Inflation is a time for investors and savers to reevaluate their strategies,” said Walter Russell, CEO of financial advisory firm Russell and Company.
Through the Federal Reserve, the government tries to fight inflation on a large scale by increasing the which is the interest rate commercial banks use to borrow and lend money to each other.
When the cost of borrowing becomes higher, higher interest rates trickle down to consumer banking products such as loans and mortgages, making them more expensive. But higher interest rates can also apply to deposit accounts, which means banks are starting to offer higher interest rates on checks, savings and certificates of deposit.
No one knows what the future holds, but by changing how you spend and where you keep your money, you may be able to weather periods of inflation more easily.
Here are some ways to save in times of inflation.
Look for high yield interest rates
It can be frustrating not being able to get loans for big purchases so easily during times of high inflation. Yet consumers can take advantage of higher interest rates on bank accounts to combat the effects of inflation on their cash flow. Interest rates on bank accounts usually don’t totally beat the rate of inflation, but these accounts can help protect against inflation much better than keeping money at home or in a low-rate account. .
The national average annual percentage return on savings accounts is 0.06%, according to the Federal Deposit Insurance Corporation, but many financial institutions offer much higher rates, some even as high as 1.00% APY or more. To find these rates, you can search for high yield or high interest accounts and choose the bank that suits you best.
Find ways to cut costs
If it’s been a while since you’ve looked at your budget, now might be a good time. During the pandemic, you may have subscribed to several streaming services that you no longer use, or you may be spending more money eating out or paying for more convenience services now.
You can cycle more often instead of driving everywhere, and you can reevaluate your food budget to add more healthy, inexpensive meals. For a bigger change, you could downsize your accommodation to save even more money.
Consider investing or buying bonds for long-term savings
It’s a good idea to keep short-term cash – like an emergency fund – accessible in a savings account, but if you have savings that you don’t think you’ll need for a year or more, you’ll want to perhaps consider investing these funds or purchasing a treasury bond.
“For someone who has a lot of cash in reserve, (investing) might help you not lose money,” Russell said. “More people might be willing to take on more risk because they want a higher rate of return.”
Russell also recommends consumers consider getting Series I savings bonds from TreasuryDirect, which can pay an interest rate of over 7% on up to $10,000 for a one-year term. These bonds are basically like a certificate of deposit: you put your money in one for a year, and at the end of the year you have a guaranteed rate of return that hopefully stays above the rate of inflation. current – so your money won’t lose value.
The government will continue to review inflation data and make appropriate changes to the federal funds rate. However, other factors could dampen inflation over the coming year, such as changes in global supply chains that could release inventory and lead to lower prices for goods. Whether inflation is rising or falling, it’s a good idea to keep an eye out for ways to maximize your savings.
This column was provided to The Associated Press by 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.