By René Bennett, Bankrate.com
When inflation is high, consumers can feel the impact everywhere, from the supermarket to the gas station. Inflation makes it more expensive to buy basic essentials on your grocery list, afford rent, pay utility bills and, well, live.
While we wait for inflation to reach the 2% rate targeted by the Federal Reserve, you can take steps to protect your savings — and your financial health overall.
How to protect savings from inflation
1. Budget for savings first
If you’re making a comfortable salary but notice that you run out of money for savings before you’ve even realized it, it might serve you to plan ahead. Figure out how much you can comfortably save from each paycheck — then put that amount into savings from the outset.
“If you put that savings first, you can find a way to live within the bounds you set for yourself,” says Sam Lewis, founder and financial planner at SJL Financial in Wilmington, Delaware.
The amount you should save depends on a couple of variables, including your total income, household size and what savings goals you have. A common budgeting strategy is the 50/30/20 rule — 50% of your income goes to needs, 30% to wants and 20% to savings.
However, it may not be realistic for many to stow away 20% of their income. What’s important is trying to save regularly and making a habit. If you can, find ways to cut down on expenses and outline a plan to contribute some of that saved money at the beginning of the month to a savings account, with the goal of not tapping into that savings for daily spending.
There are various budgeting apps that can help you stay on track with a savings strategy and help save on time, too. Some of these apps even analyze your income and spending to help you determine how much you can save each month.
2. Set spending priorities, focus on paying down debt
Once you’ve set aside a certain portion of your budget to build a decent savings cushion, consider the best way to allocate spending, looking out for where spending could be trimmed. Being more aware of your spending can help to eliminate impulse purchases.
“Become more intentional about the amounts within your spending categories,” Lewis says. “What is the best use of your limited resources?”
A good strategy is to prioritize paying down credit card debt or other types of consumer debt. If you get out of debt sooner, you can save more in the long run because you’ll be limiting the amount of interest you’re paying.
“If you have any credit card or other personal debt, you will most likely get a better return by paying down the debt than putting the money in savings,” says Jay Zigmont, CFP and founder of Childfree Wealth, a financial planning firm based in Mt. Juliet, Tennessee.
For credit card debt, consider moving your balance to a balance transfer credit card, which may come with an introductory period of no interest charges for a year or more.
3. Cut back on energy bills
The high costs of utilities like water and electricity can chip away at potential savings. You can save on energy, especially during the hotter months, with a few lifestyle changes. Plus, doing so helps reduce the overall consumption of limited resources and contributes to building a greener nation.
The U.S. Department of Energy offers a guide with numerous tips for reducing utility bills. Here are several of those pointers:
- Save up to 10% on heating and cooling by turning the thermostat down seven to 10 degrees Fahrenheit for eight hours a day during the fall and winter, or turning it up during spring and summer.
- If you have access to your water tank, insulating it can save 7 to 16% annually in water heating costs.
- Put scraped dishes in the dishwasher instead of hand washing them, and only run the dishwasher when it’s full.
- Cover and wrap foods in the refrigerator to prevent moisture from being released, which can reduce how much energy is needed by the refrigerator’s compressor.
- Use small appliances (such as microwaves and toaster ovens) for small meals, rather than a large stove or oven, which can save on cooling costs during the summer by generating less heat.
- When doing laundry, using warm water instead of hot water can cut the amount of energy used for the load in half.
- Unplug electronics when not in use, or use advanced power strips that prevent the electronics from drawing energy when turned off. Electronics that use up energy when turned off can add 10% more to a monthly electric bill.
- Switch to energy-efficient LED lightbulbs; you can save up to $80 in electricity over the course of the lightbulb’s lifetime.
4. Shop for cheaper alternatives
As you shop for groceries or home goods, compare brands and see if there’s a cheaper option. Look for store brand items, which are often significantly cheaper than other brands, and shop for local sellers of produce.
If you get in the habit of comparing prices and choosing cheaper alternatives, “you’re not going to immediately feel the impact, but over time you’ll see it in your savings,” says Lewis.
5. Consider a side gig
The reality is that we can’t completely stop ourselves from making purchases that aren’t totally necessary. But it’s possible to offset these costs by taking on more work to pay for them.
“If you are in a cautionary mode about spending and saving, but you still want something that’s unnecessary — you can do that once you earn enough money from a side gig,” Lewis says.
Some of the ways you can make some extra cash on your own time include:
- House-sitting or babysitting
- Dog-walking
- Filling out paid surveys, such as with Survey Junkie
- Reselling your clothes online, such as with Depop or Poshmark
- Teaching English to children in different countries with programs such as VIPKid (you don’t even need to speak another language)
Look for side hustles or gig work that aligns with your interests. Then, you can generate more income while also developing skills in something you’re passionate about.
6. Negotiate for a raise
If you’ve been thinking about asking for a raise at work, now is the time to do it. If it works, see your pay increase as a savings opportunity. You can use the extra cash to pay down debt or contribute to an emergency fund.
Plus, you can use the opportunity to demonstrate to a supervisor or employer all of your achievements and contributions to the workplace. Doing so can help you make strides toward advancing in your career and realizing broader career goals.
FAQs about how to save money in this economy
- Where can I put my money to keep up with inflation? High-yield savings accounts (HYSAs) are a popular option for storing cash, since they tend to offer significantly higher interest rates than traditional savings accounts. A high-yield savings account is a great place for your emergency fund.Certificates of deposit (CDs) will also pay you more interest than traditional savings accounts, but they require you to lock up your money for a set period of time – typically between three months and five years. Other options include Treasury Inflation-Protected Securities (TIPS), short-term bonds and the stock market.
- What should you not do during inflation? The first thing you should remember when inflation takes off is to not panic. It may be tempting to sell stocks in order to have extra cash on hand, but financial advisors tend to say it’s best to stick to your long-term investment plan. You also don’t want to pile on the debt, especially high-interest debt like credit cards, when funds are tight.
- What is the fastest way to reduce inflation? The Federal Reserve implements different monetary policies to get inflation to its 2% target. One way it aims to reduce inflation is by cutting interest rates, which the Federal Reserve did 11 times in 2022 and 2023.
Bottom line
Between highly inflated prices on everyday items like groceries and fears of a recession, it’s easy to feel defeated when inflation is high. But it’s never too late to develop financial literacy and look for what opportunities might come about.
Certainly, paying down debt is one of the most important things to prioritize with your finances. You can work on paying down debt while committing to putting at least a little bit of money into an emergency savings fund, which can help you stay more financially prepared in the long term.
You can also cushion savings with some extra cash by cutting down on utility bills, picking up a side gig here and there and negotiating for a raise at work.
Key takeaways
- Focus on paying down your debt and budgeting.
- Look for ways to cut back on spending, such as buying cheaper alternatives at the grocery store.
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