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3 Simple Ways to Protect Your Money from Inflation

hands protecting money in a piggy bank from inflation

This week the Fed announced that it would be leaving interest rates near 0% until 2023 in hopes that cheap borrowing will incentivize companies to expand and create jobs, and get more Americans back to work. But the announcement also stoked the fire fueling the rising fear of inflation. Cheap borrowing, stimmies, increased unemployment benefits, and city reopenings have created a spending frenzy and the biggest rise in consumer prices in nearly 13 years.

According to the Fed, inflation is projected to be at 3.4% this year instead of the 2% annual inflation rate we’re used to. While prices in 2021 are rising faster than usual, inflation is nothing new. Once it dips back down to a more normal level it’s still going to continue to eat away at the value of your money. The good news is that you can protect your money by doing just a few simple things. These are the three best ways to protect your money from inflation. 

Use a High Yield Savings Account

Your emergency savings is the foundation for healthy finances, but any cash you hold is constantly being gobbled up by inflation. To protect the purchasing power of the money in your emergency savings, you should put it in a high yield savings account. 

High yield savings accounts, or HYSAs, pay you a higher interest rate than traditional savings accounts for keeping your money in them. In some cases, HYSA rates are a staggering 25x higher than traditional savings rates. That 25x higher interest rate is what will help combat the effect inflation is having on the purchasing power of the money in your savings. 

To help you choose the best HYSA for you, here are some things you should consider during your search. 

  • It’s FDIC insured – if your bank fails and doesn’t have the money to pay back all of the money you deposited with them plus the interest you’ve earned, the FDIC will make sure you’re compensated in full. 
  • Transfer times – many HYSAs are offered by online banks separate from your checking account. That means it can take several days for the money in your HYSA to transfer to your checking account if you need it. It also means that you may not be able to access your money at an ATM or be issued a card for your account. Make sure you’re comfortable with the limitations of your provider.
  • Account functionality – different accounts provide different functionality. For example, some let you segment your money into multiple buckets to save for different goals while others only let you keep one lump sum. It’s more important to choose an account with functionality that you like rather than the account with the highest interest rate. The interest rate of your account will fluctuate and sometimes it will be higher than the competition and other times it will be lower, but you’ll always be stuck with the same functionality.

Invest Your Money

Once you’ve hit your emergency savings goal, it’s time to invest. When deciding what to invest in to combat inflation, you need to pick investments with average rates of return that are higher than the rate of inflation. 

The stock market and real estate are two popular investments that average higher returns than inflation. The average return on the S&P 500 is 10% per year and the average home appreciation is 4% annually not including rental income. With rental income included, the return on an investment property would be higher than 4%. 

If the returns on your investments are higher than the rate of inflation, you’ll be preserving your purchasing power and building additional wealth. 

Ask for a Raise

This is one of the most overlooked strategies for preserving your purchasing power. Most people don’t think about the fact that if you make the same salary for several years while prices increase at a rate of 2%+ each year, you’re actually getting poorer. To prevent that, you’ll need to at minimum get a cost of living raise equal to the rate of inflation each year. To make sure you can, at minimum, maintain your lifestyle, here are some pointers on how to ask for a raise if you aren’t offered one. 

Prepping for Your Raise

  • Keep a list of your accomplishments – This is critical if you really want to shine in front of your manager because of something called the recency bias. This is a bias people have toward giving more importance to recent events than historic ones. That means your manager could be evaluating your entire year of performance-based only on your achievements over the last month or two. It also means that you’re prone to forget about everything you achieved 6, 9, or 12 months ago also. By keeping an ongoing list of your achievements, you can refresh your memory and your bosses about the larger impact you’ve had over the year.
  • Use numbers – Improving efficiency is a great accomplishment, but if you can say you improved efficiency by 25%, that’s even better. When evaluating your performance, do your best to track measurable results. Oftentimes you’re going to need to do extra digging to find out how much of an impact you’ve actually made, but it will be worth it come evaluation time. And as a bonus, these numbers look great on a resume.

Making Sure Your Raise is Adequate

  • Calculate your raise as a percentage – to maintain your lifestyle, you need to get a raise that’s equal to the rate of inflation. If you’re told your raise as a salary number, calculate what your percentage raise is to make sure it’s adequate. For example, if the Fed is correct about 3.4% inflation this year and you started the year making $50,000, you’ll need to make $51,700 in 2022 to cover the cost of inflation. (50,000 x 1.034 = 51,700)
  • Make sure your performance raise is really a performance raise – If you wowed your boss with all of your accomplishments over the last year and you’re getting a performance raise it’s going to need to be higher than the rate of inflation. If it’s not, I hate to break it to you, but you’re actually only getting a cost of living raise.

Inflation, whether rising or “normal”, is never your friend. It is constantly making it harder for you to afford the same lifestyle and making it even harder for you to build wealth. By taking these few small steps to fight the effect inflation is having on your money, you’ll be able to preserve your wealth and make it easier to build more, no matter what the Fed’s report says about inflation. 

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