During inflation, consumers can adjust their spending and saving strategies to help lessen the impact that inflation has on the value of their money.
When it comes to spending power, inflation means that things cost more and that your money becomes less valuable. When a period of high inflation hits – like it is right now globally – you may want to consider changing up the way you handle your finances to help protect the value of your cash.
“Inflation is a time for investors and savers to re-evaluate their spending and saving strategies,” said Walter Russell, CEO of US-based financial adviser firm Russell and Company.
Throughout the world governments try to combat inflation on a large scale by raising the interest rate at which government funds are released to the country, which is also the interest rate that commercial banks use to borrow and lend money to each other.
When the cost of borrowing becomes more expensive, higher interest rates trickle down to consumer products such as loans and mortgages, making them more expensive.
However, higher interest rates may also apply to your bank’s deposit accounts, meaning that banks start to offer higher interest rates on savings, which in turn grows the money you set aside each month.
No one knows what the future will bring, but by making changes to how you spend and where you keep your money, you may be able to weather times of inflation more easily.
Here are three ways to save more during periods of inflation.
1. Look for high-yield interest rates
Consumers can take advantage of higher interest rates on bank accounts to fight the effects of inflation on their cash. Bank account interest rates usually don't totally beat the rate of inflation, but these accounts can help hedge against inflation far better than keeping cash at home or in a low-rate account.
The average annual percentage yield for savings accounts is currently about 1 per cent worldwide, but there are plenty of financial institutions that offer rates that are much higher. To find these rates, you can research high-yield or high-interest accounts and choose the bank that works best for you.
2. Find ways to keep costs low
If you haven't looked over your budget in a while, now may be a good time. During the pandemic, you may have subscribed to multiple streaming services that you don't use anymore, or you might be spending more money dining out or paying for more convenience services now.
Some people are taking radical steps to save money. Amanda Claypool, a US-based financial blogger, has recently made larger lifestyle changes to keep her costs low in the face of inflation. She's trimming her budget by biking 25 kilometres round-trip to work and by eating cheaper but healthier meals.
“I'm concerned about rising costs of food worldwide and the impact that will have on me,'' Claypool said through direct message. “I'm using the time now to prepare by learning what food my body actually needs compared to what I enjoy eating. This might seem drastic, but it's helping me save money and eat better in the short term.”
Not everyone can or wants to take drastic steps, but Claypool's money-saving tactics can work on a smaller scale. You can use alternate means of transport, and you can re-evaluate your food budget to add more cheap healthy meals. For a bigger change, you could downsize your housing to save even more money.
3. Consider investing or buying bonds for long-term savings
It's a good idea to keep short-term cash – like an emergency fund – accessible in a savings account, but if you have savings that you don't expect to need for a year or more, you may want to consider investing those funds or buying a treasury bond.
“For someone who has a lot of cash sitting on the side-line, (investing) could help you not lose money,'' Russell added. “More people might be willing to take on more risk because they want a higher rate of return.”
Russell also recommended that consumers look into getting government savings bonds, which are available in every country globally, as these can give higher-yet-reliable rates of interest.
These bonds are basically like a certificate of deposit: You put your money in one for a year, and by the end of the year you have a guaranteed rate of return that hopefully stays higher than the current rate of inflation – so your money won't lose value.
Governments worldwide are widely expected to continue reviewing inflation data and make appropriate changes to their interest rates.
However, there are other factors that may slow inflation in the coming year, such as changes to global suppliers that might free up inventory and lead to lower prices for goods. No matter whether inflation goes up or down, though, it's a good idea to keep an eye on ways to optimise your savings.
