How to Protect Your Money from Inflation

Inflation is hurting the wallets of consumers around the globe. The United States recently recorded a 7.5 percent inflation rate – the highest level in 40 years. As prices continue to rise, everyday Americans are losing their purchasing power to high inflation levels. Letting your money sit in a savings account is no longer effective in combatting inflation. The average savings account pays 0.06 percent in interest – nowhere near the country’s inflation rate.

Fortunately, various strategies can help you match or beat inflation to avoid losing significant purchasing power. These techniques do not have a 100 percent success rate, but they’re often a better choice than doing nothing with your cash. Before creating a plan to protect your money from inflation, we recommend speaking with a licensed financial advisor.

Want to protect your money from inflation and maintain your purchasing power? These are some of the best strategies to hedge inflation:

Open a High-Yield Savings Account

Many large financial intuitions offer high-yield savings accounts, including American Express, Marcus by Goldman Sachs, and Discover Bank. These savings accounts pay anywhere from four to 20 times more than the industry average. You might be wondering, “how do these banks offer higher interest rates?” The answer is relatively straightforward – institutions that offer high-yield savings accounts typically operate online and have lower operating costs. Thus, you can’t walk into a local branch and make a deposit or withdrawal from your account. Your current bank may not offer a high-yield savings account, meaning you would need to keep funds at two banks.

Buy Gold

Investors have long considered gold one of the best assets to hedge against inflation. Gold holds its value and helps individuals maintain their long-term purchasing power. However, gold can undoubtedly dip in the short term and isn’t a commodity popular amongst day traders. Suppose you buy gold to protect your money against inflation. In that case, it’s essential to consider how monetary policy can impact gold prices. For instance, the government can stimulate the economy, prompting more investors to purchase stocks, cryptocurrency, and real estate. The market pump could, in turn, decrease the demand and price of gold.

Invest in Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) give you exposure to commodities and stocks without having to buy them directly. For example, let’s say you wanted to buy silver – another popular metal used to protect money against inflation. You could purchase SLV – a silver ETF that has a current year-to-date return of roughly four percent. The benefit of ETFs is that you can buy and sells shares when the stock market is open, much easier than selling a physical commodity. Other popular ETFs to hedge against inflation include the United States 12 Month Oil Fund (USL), Vanguard Real Estate ETF (VNQ), and iShares Core S&P 500 (IVV).

Purchase Real Estate

If you have enough money for a down payment and a solid credit score, you could consider purchasing real estate to protect your money from inflation. Real estate generally has a direct relationship with stocks and bonds. When stocks and bonds increase in price, so does real estate. In addition, home prices typically trend upward over time. For example, the median home price at the beginning of 1992 was around $98,000. The current home price at the beginning of 2022 is approximately $350,000. Nevertheless, there’s always a risk of market corrections like what happened during the real estate crash in 2008.

Buy Treasury-Inflation Protected Securities (TIPS)

Treasury-Inflation Protected Securities (TIPS) says it in the name – the sole purpose of these financial instruments is to hedge against inflation risk. Investors can purchase TIPS directly from the U.S. Department of the Treasury through TreasuryDirect. These securities pay interest at a fixed rate twice per year and are available in $100 increments. You can purchase TIPS in three different term lengths: five, ten, and thirty years. At the maturity date, you receive the greater of the original principal or adjusted principal. In the event of deflation, you still receive at least the original principal at the maturity date.

Refine Your Budget

You don’t necessarily need to invest in ETFs or move your money to a high-interest savings account to protect yourself from inflation. During inflationary periods, consumer prices increase, making it challenging to stick to your budget. You can use our expense management tools and money organizer to refine your budget and monitor your spending. Our platform lets you see spending by categories, such as transportation, subscriptions, and entertainment. You can quickly identify areas where you’re spending too much and where you can cut back. Once you identify those opportunities, you can use your newfound residual income to pay down debt or invest.

Diversify Your Investments

Any veteran investor will tell you not to put all your eggs in one basket. There are a few ways investors diversify their portfolios to reduce inflationary risk. First, individuals may invest in international ETFs, as inflation in one country might be non-existent in another. In addition, many investors buy stocks in a wide array of industries since inflation impacts every sector differently. For instance, industries that hold a lot of inventory (i.e., retail) tend to suffer during times of high inflation. On the other hand, real estate and commodity-based companies see increased profits.

Consider Investing in Value Stocks

Investing in value stocks is another way to hedge the risk of inflation. We recognize that investors (especially beginners) are cautious when it comes to buying stocks in an inflationary market. Many people prefer to buy and hold value stocks when there’s high inflation. Value stocks are stocks that outperform other companies during inflationary periods. Examples of value stocks include Wells Fargo & Company (WFC) and Proctor & Gamble (PG). Investors can either keep their money in the stocks or realize them for a profit and use our debt planner to pay off debt and make headway towards financial freedom.

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