How to Handle Your Money During High Inflation

Itf you’ve purchased gas, groceries, a car, a home, or just about anything else lately, you’ve noticed that things are getting more expensive, quickly. The largest year-over-year increase in inflation for over 40 years was 8.5% recorded in March.

Inflation can be caused by an imbalance of supply or demand. This period of inflation is unique because the economy is under pressure from both the supply and demand sides. Lindsey Bell is the chief market strategist at Ally Financial.

“On the supply side, obviously COVID was the leading driver, where there were significant bottlenecks in supply chains, and a slowdown in production and shipping,” she said, adding that talent shortages and the war in Ukraine have recently added to supply constraints. “There’s also been elevated demand in this post-pandemic period, partially driven by the stimulus that put money into the consumer’s hands, as well as into the market.”

Americans often have limited experience in saving, investing, budgeting and managing their finances in such an inflationary environment. The experts offer advice on how to prioritize your finances for the next few months.

Step 1: Create a budget

Budgeting is a good way to manage your expenses. This has been especially true in the recent years as inflation has forced many Americans into the habit of budgeting. Survey by shows that 82% of Americans budgeted their spending in 2021, as opposed to only 68% for 2019.

If you’re among the 20% that still hasn’t mapped out your spending now is the time to do it, “just to keep track of how you’re spending and what you’re spending on, given that there’s been significant price changes in different categories,” says Bell.

Bell says that cost reduction measures can be simple to offset rising prices. Bell recommends cancelling subscriptions, auditing, and consulting price comparison sites online before you fill up your tank. “At the grocery store one of the easiest things to do is to trade down from name brands to private label brands,” she says.

Step 2 – Pay off variable debt

Paying off debt is often a low priority on a person’s financial list. They do this with any money left at the end each month. Paying down debt—especially variable debt, like credit cards, lines of credit, personal loans, and variable rate mortgages—should now come second to living expenses, and well ahead of investing, says author, financial advisor, and founder of Live, Learn, Plan, Jay Zigmont.

“While there are a lot of things you can do to invest, if you got something like , you’re not going to beat that with any investment,” he says.

Step 3: Create a rainy-day fund

It can be tempting for investors to look for investments that keep up with rising prices. Experts recommend that you have enough money to cover any financial emergencies immediately before considering where to invest. As simple as this may seem, only half of Americans are able to save enough money for an emergency payment of $1,000.

“If you have debt, pay it off first, but second is putting it in an emergency fund,” says Zigmont, adding that those funds will only accumulate a fraction of a percentage point in interest. “An emergency fund will stay in a account, and frankly you’ll effectively lose money because of inflation, but it has a job—to be there in case of emergency—so you don’t want to risk that.”

Step 4: Get to know the bond markets

Individuals who have at least 3 to 6 months’ worth of living expenses and are free from debt should look for investment opportunities that can be safe but also guaranteed to grow with inflation.

Bell and Zigmont both suggest I-Bonds. They are backed by U.S. Treasury, and tie to the Consumer Price Index. That’s because its interest rate is adjusted every six months—in May and November—based on the rate of inflation, and can be cashed out after a year.

“If you think inflation will continue to move higher over the next six months, it’s not a bad place to be, but you can only put $10,000 into it every year, so it does limit your investment,” says Bell.

Next, you should consider Treasury Inflation Protected Securities (or TIPS). “Dipping your toes into the bond market with TIPS, if you don’t need that money for two-plus years, is a more beneficial place to be,” adds Bell.

Bonds may be bought through your bank, broker or directly on the TreasuryDirect site.

Step 5 – Invest in your Home

Recent increases in the price of homes have made it a good time for current homeowners. However, this is not good news for anyone looking to buy a home. Although rising interest rates may cool the market, Bell suggests that renters wait a bit longer to purchase their first home.

Even though building materials and labor are at an increasing price, she advises homeowners that they invest in the properties they already own before buying a home.

“Home improvements continue to be economical, so long as home prices are going higher,” she says, adding that, “economists expect home prices to remain elevated, even though mortgage rates are rising.”

Bottom line

The market’s oddities and potential opportunities inspired many Americans over the past few years to invest in the stock market. Inflation is on the rise and now is the right time to avoid the riskier investment opportunities and to return to the tried and tested methods for protecting your wealth. It means budgeting, paying off your debt, establishing an emergency fund, before you put money in the market. And, investing in safe assets tied to inflation.

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