How to Protect Your Money from Inflation

Learn how your savings and investments can be impacted during times of rising inflation and how to protect your money.

One of the most familiar words being used today in any economic news story is inflation. By definition, inflation is the rise of the average cost of goods and services most typically measured by CPI – Consumer Price Index. Although not much of a concern for many years, it is now apparent in almost every dollar spent. This is most notably seen at the grocery store, gas pump, monthly utility bills, etc. While this generally happens at a steady rate, the current increase has been at a significantly higher pace in recent months. As of February 2022, the current inflation rate is 7.5%—its highest level in 40 years.

It is important to understand how your savings and investments can be impacted during times of rising inflation and how to protect your money. Because of this, we’ve outlined some information to keep in mind:

Liquid Savings
The typical interest earned on bank deposit accounts such as checking or savings accounts does not keep pace with inflation. This means eroding principal by not being invested in a vehicle earning the same or better than the inflation rate. If you have $100 in a savings account, that balance is likely to grow to $100.20 over the course of a year based on current rates. Now, compare that to a basket of goods that costs $100 today which will cost $106.20 over the same course of time. To keep your savings from eroding, consider options that help protect against inflation.

Stocks, some types of bonds, and real assets can provide a hedge against inflation.

Stocks generally have greater returns over time resulting in gains that exceed the inflation rate. Historically, the stock market, as measured by the S&P 500, has averaged about 10% per year over the past 100+ years while inflation has averaged 3-4% over the same period.

Savings Bonds
Certain savings bonds can also provide some protection against inflation. For example, treasury inflation protected securities (TIPS), also known as I Bonds, are a good investment during periods of high inflation. The fixed portion of the interest on these U.S. government-issued securities is currently near 0% and fixed for the life of the bonds. However, the inflation-based rate portion is based on the CPI rate, which adjusts every May 1 and November 1 so it will fluctuate over the life of the bond. Most recently issued I Bonds are earning 7.12%. An investor needs to consider that you can only purchase $10,000 worth of electronic I Bonds during a calendar year in most cases. You can purchase an additional $5,000 in paper I bonds as well, but only if you use your federal income tax refund to do so. You also need to know that I Bonds cannot be redeemed for one year, and if you cash them in before five years, you will lose three months of interest. In most cases, a TIPS mutual fund is a more convenient option for investors.

RELATED: Read about these tips to help you reassess your financial situation.

Real Assets
Real assets can also be a great hedge against inflation. A real estate investment trust (REIT) is one example of a real asset and an easy way to invest in income-producing real estate. Multi-family rental properties, commercial properties, storage units, distribution sites, and data processing centers can all be properties in a REIT. Although REITs fluctuate in price, they too can provide a good hedge against inflation because rents are also typically pegged to CPI.

These are just a few examples of inflation-hedged investment options and each comes with its own risk/reward profile that needs to be considered. In conclusion, having liquid/cash assets are an important part of any financial plan for safety and accessibility. However, for longer-term investments, there are better options during periods of high inflation which are necessary to keep your purchasing power from slowly slipping away.

If you’re not sure how to protect your savings, contact a financial advisor to discuss your options. We are here to help

CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM, and CFP® (with plaque design) in the U.S.
ReShelle L. Barrett, CFP®

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