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Inflation Explained: What You Need To Know & What You Can Do About It - Part 3

Inflation Explained: What You Need To Know & What You Can Do About It - Part 3

| April 19, 2023

Protecting Your Finances from Inflation: Saving

In part 3 of this month’s blog series on inflation, we will talk about the effect inflation can have on your savings and strategies to help reduce that impact. As we said in week 1, inflation is a persistent rise in the general level of prices of goods and services over a period of time. And we all know how significant its impact can be on our finances, eroding the purchasing power of our money and reducing the value of our savings. However, there are steps you can take to protect your money from inflation.

One of the most effective ways to protect your finances from inflation is through saving. Saving helps you to build a financial cushion, prepare for unexpected expenses, and plan for your future. Without it, the unpredictability of life can hit hard, and no one wants to experience the panic that comes when you don’t have the money you need in an emergency! Here are some tips for saving to protect your finances from inflation:

1. Build an emergency fund: An emergency fund is a critical component of financial planning. It provides you with a safety net in case of unexpected expenses such as medical bills, car repairs, or home repairs. Ideally, your emergency fund should cover at least six months of your living expenses. You can build your emergency fund by setting aside a portion of your income each month and keeping it in a high-yield savings account or a money market fund. 

2. Save regularly: My father always told us to “pay yourself first.” By this, he meant we should set aside money for monthly savings in the same way we pay the electricity or water bills. Saving regularly is essential to protect your finances from inflation. By setting up automatic savings plans or making sure to allocate a portion of your income to savings each month, you can build your wealth and protect yourself from the ravages of inflation and the volatility that accompanies it. You’ll also save yourself during an emergency. 

3. Invest in inflation-protected assets: We discussed this in-depth in last week’s blog, but it bears revisiting.  Inflation-protected assets such as TIPS (Treasury Inflation-Protected Securities) and real estate can help protect your finances from inflation. These assets are designed to increase in value as inflation rises, providing a hedge against inflation. TIPS are bonds issued by the US Treasury that pay a fixed interest rate plus an adjustment for inflation. Real estate can provide a hedge against inflation by increasing in value over time and generating rental income. I happen to be married to a realtor, so I can attest to this first-hand!

4. Diversify your investments: Diversification is key to protecting your finances from inflation. By spreading your investments across different asset classes, such as stocks, bonds, and commodities, you can reduce the impact of inflation on your overall portfolio. Stocks can provide growth potential, bonds can provide stability, and commodities can provide a hedge against inflation.

5. Monitor your spending: Keeping track of your spending is essential to protecting your finances from inflation. By identifying areas where you can cut back and save more money, you can build your savings and protect yourself from inflation. You can use budgeting apps or software to track your spending and identify areas where you can reduce your expenses. You can also plan ahead for large expenses like college or replacing an HVAC system that is getting older. The key to an inflation-protection strategy is the P-word: Planning!

The moral of the story, folks, is this: Protecting your finances from inflation requires a comprehensive financial plan that includes saving, investing, and monitoring your spending. By building an emergency fund, saving regularly, investing in inflation-protected assets, diversifying your investments, and monitoring your spending, you may be able to safeguard your finances against the impact of inflation. Remember, inflation is a long-term phenomenon, so it's essential to take a long-term approach to protect your finances. By following these tips, you can build a strong financial foundation that can withstand the effects of inflation and help you achieve your financial goals.

Until next time…

One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.