5 Ways To Protect Yourself From Inflation

One of the greatest threats to your personal finances is inflation. Inflation has likely impacted you personally, especially over the past year. The consumer price index (CPI), a measure of inflation in the U.S., jumped by 8.5% in March, the highest level since December 1981. Inflation is here, but the good news is that there are some things you can do to protect yourself against it.

So, what is inflation?

Simply put, inflation occurs when the price of goods and services increases at a higher rate than your money, causing a decrease in the purchasing power of your money. When I was much younger, my wife and I visited her grandma, and she told us about how she and my wife’s grandfather had built their 1,500 square foot brick ranch house brand new in 1962. She said it was a “stretch” for them at the time at around $14,000. I found that amusing considering today’s housing market. That same house now sells for 15X that amount, yet household wages grew by 12X over that same time, largely due to the growth of dual-income households that didn’t exist to a large extent back in those days. This is inflation.

Why does inflation matter in everyday life and retirement planning?

Over the past year, inflation has hit Americans the hardest at the gas pumps, at the grocery store and on home prices. If your wages are not keeping up with the increasing price of fuel, food and housing, inflation has you in a crunch. Your dollars are not buying as much as they used to. Over the past several years, some companies, have taken measures to prevent passing inflation on to customers. Candy bars used to be larger when I was a kid. Now, they’re smaller and more expensive. Some companies cut corners or reduced sizes (and left the box size the same to trick you) in an effort to keep prices from shooting up. But now, even Dollar Tree has fallen victim to inflation, recently raising its prices to $1.25. Talk about a branding nightmare. Soon, they’ll be Dollars Tree – plural.

Inflation matters in your everyday life because it impacts affordability. When times get tough, you can adjust with fewer ‘nice to haves’, but when ‘need to haves’ like food, fuel and housing become unaffordable, it can cause a crisis situation.

Inflation is likely one of the greatest threats to your retirement planning and your overall retirement. If you are lucky enough to have an inflation-protected pension, congratulations! For most, however, who have to manage their own retirement savings, inflation is a real risk due to the finite nature of your money. When you are retired and as you age, your wage-earning potential decreases with time. Inflation can wipe out a big chunk of your savings if you don’t have a plan.

Here are 5 tips to protect yourself from inflation

1. Re-negotiate your salary or get a new job

One of the quickest ways to combat and protect yourself from inflation is to earn more. How much you make, how often you receive raises and the percentage of those raises play a role in keeping up with or ahead of inflation. If the consumer price index (the main measure of inflation) is at 8.5%, and you are already stretched with your current salary, things just got much more difficult if you haven’t gotten much of a raise in the past year. The money you earn is not going to cover as much of your living expenses, so in essence, your pay has actually been cut.

If you are a dependable, solid performer at work, one way to address this is to put a case together and approach your boss about a raise. With inflation alone, this makes up part of your rationale. Another is the current demand for talent. I’ve heard several stories recently of employers providing retention raises or bonuses to keep employees from seeking other work. My suggestion, get to your employer sooner than later so that you still have this leverage.

Another way to protect yourself from inflation is to earn more through a side hustle. There are so many opportunities out there currently. Many employers are also willing to be more flexible, even with part-time workers. Plus, sometimes it pays beyond the money you earn to have a part-time job. Make sure you check on the perks and choose a part-time employer wisely. I know a woman who chose to work part-time at her favorite clothing store so that she could get their 50% employee discount to buy dress clothes for her full-time job. Working part-time at a grocery store pays you extra income, plus provides a discount on groceries (a need). If you enjoy movies, get a part-time job at the movie theater to see them free.

If you are already retired, part-time work is a great way to supplement social security or other retirement income to combat inflation. It also can keep you mentally and physically healthy by providing social interaction and purpose.

2. Do not hold too much cash

It is recommended that you have 6-12 months worth of expenses (not income) in an emergency fund. Beyond an emergency fund or cash that you have on hand for the near-term need, there is no good financial reason to hold too much cash. Why? Cash in a savings account, earning less than 1% interest when inflation is higher than that, is literally disappearing from your account. The purchasing power of those savings, if not put to work, dwindles every month that it is left there if inflation is higher than what you’re earning in interest. To build wealth, you need to put money to work.

3. Opt for inflation-protected investments

The investments you choose impact your ability to protect yourself from inflation.

The stock market is one way to protect yourself from inflation. I personally invest in low-cost index funds. The stock market over time has outpaced inflation. And one of the main reasons is that the stock market is made up of all sorts of companies selling pieces of their companies to investors. Those companies raise prices over time to cover their costs, pay their workers more over time and so forth. When they raise prices, their earnings rise, and the value and price of stocks continues to rise over time. Over time, the stock market has had ups and downs, but it always goes up with time. Always.

If you are looking for something more stable than the stock market, you may want to consider i-bonds. Currently, i-bonds issued by the U.S. Department of Treasury are one way to keep money in an investment that is currently earning between ~7-9% and is backed by the full faith of the U.S. government. The only downside I see is that you are limited to investing $10,000 per person per year, and you must keep your money in for at least 12 months. So, don’t put money in that you need in the near term.

At the time of this article, if you were to put money into an i-bond in April 2022, you would earn 7.12% annual interest for the first 6 months, and 9.62% for the next 6 months. So, an average for the year of 8.37%. Not too shabby. Since i-bonds follow inflation, they are inflation protected investments. If you are married and have children, you can buy $10k per year per family member. If you’re interested in learning more, check out my previous article on i-bonds.

4. Delay unnecessary purchases and reevaluate your budget

Another way to protect yourself from inflation is to reduce or delay unnecessary purchases. When inflation is running rampant, prices outpacing your income, and you are still spending money the same way you’ve always been, inflation will impact you the most. After all, there are only so many dollars to go around to your various expenses. By putting off purchases, such as cars, or reducing how much you dine out, you can make up for the toll that inflation is taking on your household budget for the things you might not be able to impact as much, such as utilities.

5. Evaluate your own personal inflation

Do you know where inflation is impacting you the most? Everybody’s personal inflation rate is different. Prices at the pump will impact someone who commutes regularly to a workplace vs. someone who works from home. Car prices will impact those who are in the market for a car currently vs. those who have perhaps held on to their vehicle longer. By evaluating your own personal inflation rate, you can get some insight into where you have control and where you don’t.

You do not need to be a victim to inflation

The decisions we make in our daily lives will determine how inflation impacts us. By looking through and evaluating your own decisions with money, you can get a better handle on inflation in your own life. It is easy to blame inflation, gas prices, even the President of the United States on your money troubles, but your energy is better served in evaluating yourself and your finances. Don’t blame gas prices if you’ve chosen to purchase a giant gas-guzzling SUV. Don’t blame utility prices if you’ve made the decision to live in a 5,000 square foot home. Spend your energy evaluating YOUR decisions and what you can do to optimize your life moving forward. And, if you need guidance, Good for Your Wealth is here along the way.