Are you feeling the pinch of rising inflation? Consumer prices increased by 9.1% in the 12-month period from June 2021-2022. When you have to spend more on necessities such as groceries and gas, it can be harder to set aside money for savings. At the same time, the Federal Reserve has been steadily increasing interest rates in an attempt to slow inflation. Rising rates can help you build savings if the interest rate on your savings account also rises. However, it will also be more expensive to borrow money if you’re planning to buy a home or car, or if you’re carrying revolving credit balances.
Taken together, rising inflation and interest rates can be challenging for people who are working to build their savings after years of stable inflation and low interest rates. In this article, we’ll offer tips for saving money during inflation.
How Does Inflation Affect Your Savings?
Inflation effectively makes your cash less valuable in real terms. It’s a loss of purchasing power, meaning your dollar doesn’t go as far as it used to. We are all experiencing this when we pay at the pump or in the grocery store checkout line. Your income is the same, but it can’t pay for as much as it used to.
When it comes to your savings, inflation may force you to re-evaluate your savings strategy in order to stay on track with attaining your savings goals.
If your cash and savings are in low-interest checking or savings accounts during periods of high inflation, then your funds are actually becoming less valuable compared to items or services you could purchase with your money. This means that people who have been stashing money with medium or long term goals in mind may actually see these goals getting further away, rather than closer, as the value of their money isn’t keeping pace with market conditions.
However, this doesn’t mean you should stop saving altogether. There will always be a place for an accessible savings account in your broader financial strategy. Follow these steps for the best means of saving during inflation.
Understand Your Savings Goals
When re-evaluating your savings strategy, it’s important to review and take stock of your savings goals. Pause and consider what you are trying to achieve. Make sure that these goals are still realistic so you can prioritize effectively. For example, in difficult economic conditions, it may no longer be tenable to save for both a dream vacation to Europe and a down payment on a new home. Which you decide to prioritize will impact how you decide to save or invest your money.
Take a moment now to jot down your short and long-term savings goals. What do you want to prioritize for saving during inflation? Examples may include:
- Establishing or adding to an emergency fund
- Down payment on a home purchase
- Major home renovation project
- Down payment on a new car purchase
- New laptop
- Starting a business
Take Advantage of Tax Benefits
If your employer offers a 401(k), Individual Retirement Account (IRA), HSA, or other type of tax-advantaged savings account, utilize these accounts to help you build your savings while lowering your taxable income.
Interest rates on these accounts vary, depending on whether or not funds are invested in the stock market. The more money you are able to protect from taxation, the more you can offset losses caused by inflation.*
Look Into Investing
Investing is a commonly-recommended strategy to beat inflation. While investing in the stock market gives you the opportunity to outpace inflation with earnings, it does carry inherent risk.
One reason for the current volatility in the stock market is the Fed’s move to raise rates in order to beat back inflation. This has had a negative impact on the recent performance of the stock market, but historically investing offers a positive rate of return over the long term. That’s why the stock market is best for long-term savings goals, such as retirement, whereas short-term savings goals and your emergency fund are best kept in an FDIC-insured savings deposit account.
To mitigate risk, investors can be thoughtful about diversifying the places where they put their money. This is a complicated time to invest. Situations like this are why Peoples Bank offers Wealth Management Services, including investment management. Our experienced team of professionals can help you make sensible choices with your money as you seek to combat inflation.
Despite the risks to the stock market in the foreseeable future, a wise long-term investment strategy can pay off over the long-run. As market conditions improve, the value of your investments will likely also rebound, potentially outpacing returns from more risk-averse approaches.*
Open a CD Account
Another option for earning a higher rate on your savings is a CD. Certificates of deposit are a less-risky approach for people with shorter-to-medium term savings goals. In exchange for committing to a certain term length, CD accounts tend to carry a higher interest rate than other savings accounts. The longer the term you commit to, the higher your interest rate. Peoples Bank offers CDs with terms lasting between 3 to 60 months. If you decide to withdraw your funds from the CD account before the term ends, you will be subject to penalty fees.
Contact Our Team!
Our experienced team in Northwest Iowa, Southwest Minnesota, and Southeast South Dakota can help you create a financial strategy for every stage of life. We tailor our products and services to suit your financial goals. To learn more, contact us!
Investment products are not FDIC insured, not a bank deposit, not guaranteed by the bank or any US Government Agency and principal may lose value.
Peoples Bank nor its representatives offer tax or legal advice. Please contact your legal or tax advisor regarding your situation.