Tips to Ease the Pain of Inflation

November 8, 2022

Tips to Ease the Pain of Inflation:

One of the most troubling developments this year is the raging inflation. We’ve seen it throughout the economy, with rising food and gas prices impacting the pockets of so many people. Now, with rising interest rates, which is used to slow inflation, consumers are getting squeezed from both sides. This environment will pass, but for now, the question looms – how long will it last?

Let’s look at some ways to help you navigate these waters.

One of the biggest things you can do to help yourself in this environment is to delay purchases of big-ticket items. This is because once inflation does come down to normal levels, we may even experience deflation (which is where prices decrease). While not always feasible, if you can – it could save you tons in the long run. Instant gratification is not a habit you want to have in a high inflationary environment.

The second tip is a continuation of the first. If you do successfully delay that instant gratification, take that spare cash and invest in the U.S. Treasury bills/bonds to offset inflation. Since the Federal Reserve has increased interest rates so much and so fast this year, it has made the U.S. Treasuries very attractive. In most savings accounts you may be lucky to get an interest rate of 1.5%. Today, the 1-year treasury bill is yielding around 4.5% which means if you invest in this bill and wait a year, you will earn 4.5% on your money (regardless of interest rate moves after your purchase). This type of investment is also guaranteed by the U.S. government. Also, if you think 1 year is too long, you can invest in shorter term maturities such as 3- or 6-month bills which yield a similar annualized rate. That way when prices do finally come down or at least stop rising as fast, you will have money ready and more of it.

The last tip is to diversify your portfolio. Inflation has always been a part of the overall economy which is why investing in a diversified portfolio will help you combat inflation over the long run. It’s hard for people to understand that if you have all your money in the bank earning 1% and inflation is a yearly rate of 2%, you will be losing 1% of your money every year! That may not sound like a lot at first but remember the power of compounding can both help and hurt you. Having a diversified portfolio with assets such as equities, bonds, real estate, Treasury Inflation Protected Securities (TIPS), and commodities will help you beat inflation on a yearly basis making sure you aren’t losing your hard-earned money!

The government understands that inflation can hurt consumers which is why they offer things such as TIPS or Inflation-Bonds, which are designed to combat inflation. There are many ways to set up a game plan to offset the effects that inflation can have on your money which is why you should consult your financial advisor. They will understand which vehicle is right for you.

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