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How to save more when inflation makes your money count less





HOW TO SAVE MORE WHEN INFLATION MAKES YOUR MONEY COUNT LESS

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By CHANELLE BESSETTE  |  NerdWallet


During inflation, consumers can adjust their spending and saving strategies to
help lessen the impact that inflation has on the value of their money. It's
important to have liquid cash set aside for emergencies, but beyond an emergency
fund, there are other ways to save money and help retain its value. These
methods include seeking out higher interest rates on bank accounts, retooling
your budget and spending, investing your excess cash or buying treasury bonds.
No one knows how long this interval of high inflation will last, but the
government will adjust the federal funds rate to help slow the economy and
prevent hyperinflation.



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
right now — 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 reevaluate their strategies,"
says Walter Russell, CEO of financial adviser firm Russell and Company.

Through the Federal Reserve, the government tries to combat inflation on a large
scale by raising the federal funds rate, which is 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. But higher interest rates may also apply to deposit accounts, meaning
that banks start to offer higher interest rates on checking, savings and
certificates of deposit.



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 some ways to save more during periods of inflation.



LOOK FOR HIGH-YIELD INTEREST RATES

It can be frustrating to not be able to get loans for big purchases as easily
during periods of high inflation. Still, 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 national average annual percentage yield for savings accounts is 0.06%,
according to the Federal Deposit Insurance Corporation, but there are plenty of
financial institutions that offer rates that are much higher — some even 1.00%
APY or more. To find these rates, you can research high-yield or high-interest
accounts and choose the bank that works best for you.





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 even more radical steps to save money. Amanda Claypool ,
a financial blogger based in upstate New York, has recently made larger
lifestyle changes to keep her costs low in the face of inflation. She spent 2021
living out of her car while driving around the country and plans to return to
that way of living soon to save on housing costs. She's also been trying to trim
her budget by biking 16 miles round-trip to work and by eating more rice and
beans, a cheap but healthy meal.



"I'm concerned about rising food costs and the impact that will have on the
entire supply chain," Claypool said through direct message. "I'm using the time
now to prepare for future food insecurity 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 move into their car, but Claypool's money-saving
tactics can work on a smaller scale. You can bike more often instead of driving
everywhere, and you can reevaluate your food budget to add more cheap healthy
meals. For a bigger change, you could downsize your housing to save even more
money.





CONSIDER INVESTING OR BUYING BONDS 

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 sideline, (investing) could
help you not lose money," Russell says. "More people might be willing to take on
more risk because they want a higher rate of return."

Russell also recommends that consumers look into getting TreasuryDirect Series I
savings bonds, which can give an interest rate of over 7% on up to $10,000 for a
one-year term. 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.



The government will continue to review inflation data and make appropriate
changes to the federal funds rate. However, there are other factors that may
slow inflation in the coming year, such as changes to global supply chains 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
optimize your savings.



Chanelle Bessette is a writer at NerdWallet. Email: cbessette@nerdwallet.com.
Twitter: @crbessette.

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