Inflation Fears: How to Protect Your Personal Finances

Feb 4, 2022

Reading time: 12 Minutes

The current high inflation rate has many people on edge when trying to manage their finances. According to the U.S. Bureau of Labor Statistics, the U.S. Consumer Price Index increased 7% year over year in 2021 versus 2020.


The CPI measures the average costs of utilities, housing, groceries, and other necessities (a “market basket of consumer goods”), meaning the price increases have left many people experiencing a pinch to their wallets and budgets.


At least in the short-term, inflation seems to have affected the prices of nearly everything, including real estate, vehicles, lumber, oil, and day-to-day goods. You may notice the impact of inflation the most when you head to a grocery or big box store and when you stop to fill up at the pump.


In some sectors, inflationary pressures might last for some time. One main area of concern is housing.


Many would-be first-time homebuyers found themselves priced out of the market in 2021. Redfin reports that the median new home price in the U.S. rose to $386,000 in 2021, representing a sky-high 24.1% year-over-year increase.


However, choosing to dip into the rental market during an inflationary period can also be problematic. According to Apartment Guide's annual rent report for 2021, the average rents for one-bedroom and two-bedroom apartments in the U.S. increased by 21.3% and 16.7% year over year, respectively.


To put it simply, inflation means that your dollars simply do not stretch as far as they used to.


Fortunately, there are some ways to protect your finances against inflation in both the short- and long-term.


Understanding Inflation


Inflation occurs when prices increase faster than real wages, decreasing the purchasing power of each dollar that you earn. For example, average wages and salaries increased by 4.2% in 2021. While some people might think that means that they are 4% richer, contrasting that figure with the Consumer Price Index of 7% for the year demonstrates that people are almost 3% poorer.


Inflation is sometimes referred to as the hidden tax because it goes unnoticed in people's daily lives. However, concerns about inflation and its impact are real.


Therefore, you’ll want to make some adjustments now, to deal with the increasing cost of living in the short-term while inflation rates are still high and protect your investment portfolio and retirement for the long-term.


Will There Be an End to the Current Inflation?


The Federal Reserve recently turned its attention from providing incentives to spur the economy during the pandemic to battling inflation.


In a press release on Jan. 26, 2022, the Federal Reserve announced it would end the bond-buying program it’s been using to facilitate growth during the pandemic by early March. However, the agency still has not increased interest rates, although it’s expected to do so three times during 2022 to combat the current level of inflation.


OPEC, which decreased oil production at the beginning of the pandemic, has agreed to increase its output by 400,000 barrels per day in Feb. 2022. This could help ease some of the gas price increases Americans pay at the pump.


On Jan. 3, 2022, President Biden signed an executive order in which his administration pledged a $1 billion investment in small meat producers to increase competition and bring down meat prices.


These and other efforts should help moderate the annual inflation rate and tamp down prices. However, there are still steps you can take to protect your finances and buying power from inflation both now and in the future.



Protect Your Finances in the Short-Term


Here are several action steps you can use to help protect your finances in the short term from high inflation:


1. Monitoring Expenses and Updating Your Budget


If you keep close track of your expenses, you have a good idea of how inflation affects your monthly spending. But if you aren’t watching your spending, it’s time to start figuring out what you spend in various budget categories each month.


A budget you created and relied on last year likely needs updating to reflect your current financial picture and spending. Once you’ve tracked expenses for a month or two, you’ll have the information you need to update your budget.


Make sure to include room for necessities with higher prices while still working to meet your monetary goals. Examine where to cut costs for everyday living expenses. Shop around for lower rates on insurance or negotiate bills such as cable TV, mobile phone service, and credit card interest rates.


If you don’t have the time or think you won’t get anywhere with your costs, consider bill negotiation services that can take over the task of negotiating for you.


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2. Become a Savvy Shopper


Many apps can help you to comparison shop so you can get the lowest prices. For example, GasBuddy allows you to check for the lowest gasoline prices in your area. You can also use apps like Basket Savings as a strategy to save on food costs by finding the lowest grocery prices in your area.


In addition to harnessing the power of technology for comparison shopping, it might be wise to temporarily put off buying certain items with higher prices because of supply chain disruptions.


In some sectors, inflation may be more temporary than in others. For example, the price of used cars has sharply increased. However, economists attribute part of this increase to a shortage of semiconductors needed to manufacture new vehicles. When the supply disruptions in semiconductors resolve, used car prices might also decrease.


Delaying your purchase of a used car for a few months might be a good idea to take advantage of better prices that might develop later in the year. You can use delayed purchasing as a tactic in other areas in which you believe the price increases are temporary rather than permanent.


No-spend challenges are another way to put off purchases and help keep some extra money in your bank account for a few months.

hands reaching into a wallet pulling out money

3. Switch to a High-Yield Savings Account


While you shouldn’t have too much cash sitting in a traditional savings account because of their low-interest rates, you still need to have easy access to your emergency fund.


You can find better rates for your short-term savings than a traditional savings account your local bank offers. Look for high-yield savings accounts online at lenders such as Ally or CIT Bank. Then, consider moving your short-term savings and emergency funds into an account supplying greater returns.



While changing to a high-yield account won't beat inflation, it’s a smart financial move for increasing what you earn on your savings.


4. But Don't Keep Too Much Money in Savings


You should look for a high-yield savings account to hold your short-term savings and emergency stash. But you don't want to keep too much of your money in a simple savings account.


For your long-term financial goals (5 years or more), including buying a house, sending your children to college, or working towards retirement, your best bet is investing.


Stocks are more likely to help you beat inflation since they carry higher potential returns, but you must understand that greater rewards also come with higher risks. We’d recommend stock index funds or exchange traded funds (ETFs) over individual stocks in most cases. Do your homework first and consider working with a financial professional who understands your goals and can help you design a plan to meet them.


5. Refinance Your Loans


While interest rates are still at historic lows, now’s a good time to consider refinancing loans such as your mortgage or student loans.


The central bank expects to increase interest rates several times this year, so a refinance now before the increases are announced could be a smart financial move. Refinancing your loans may also help to reduce your monthly payments and free up more money to use for other things.


Just be sure you research the company you plan to do business with and consider fees involved and the loss of any protections you may have with the original loans.


6. Increase Your Income


Maximizing your income can help you combat inflation's impact on your finances.


Ask for a raise. If you receive strong employee performance evaluations, consider asking your boss for more money. Since unemployment rates are low and the labor supply is short, your boss might agree to increase your pay.


Change jobs. Your current employer may not be willing to give you a raise, but a new employer could. Many employees are jumping ship in the current economy and negotiating a higher starting salary at another company.


Reimagine your business. As a business owner, you may have to get creative to increase your revenues. Start by reevaluating the benefits you provide to clients and customers and brainstorm potential aligning products or services and how you can provide them. Tap your network to help you do this if necessary. Sometimes, we’re too close to our own businesses to see weak spots and potential areas for growth.


Aside from creating new revenue streams and striving for more sales, review your company expenses and see where you can cut back to increase profit margins. Could technology help you streamline processes and improve efficiency?


Increase passive income. Consider investing in dividend stocks or renting out an extra room or parking spot. There are many ways to develop passive income streams, so research some ideas to pick the ones that might work the best for you.


Take on a seasonal or part-time job. Starting a side gig is popular now too! Besides driving for Uber or Lyft, you can deliver food through apps like Door Dash or Grub Hub, charge electric scooters, write articles for companies on sites like Textbroker, or teach others on sites like Preply or Extra jobs and side hustles can take just a few hours each week while helping you to add several hundred dollars to your monthly income.

man bending over financial reports


Protect Your Wealth and Long-Term Monetary Goals


Just like taking steps to protect your money from inflation in the short-term, you need to take steps to protect your long-term investments and your wealth.


Here are a few tips to keep in mind.


1. Consider Making 

Less Conservative Investment Choices


If you have a low-risk tolerance, your portfolio might be bond-heavy. However, bond prices decrease when interest rates rise, and the Fed plans to increase interest rates several times this year.


If your investment strategy is too conservative, it will have trouble keeping up with a high inflation rate.


Examine your portfolio and reallocate your investments, as necessary. If you aren’t sure how much money to move between asset classes or where to invest new funds, make sure to speak with a financial professional. Consider finding a fee-only financial planner who will act as a fiduciary and look out for your best interests.


While conventional planning suggests having around a 35% - 40% bond portfolio allocation when you reach age 60, you might want to decrease that allocation because of inflation and low-interest rates.


2. Invest in Stocks


Look at the mix of investments in your portfolio. In general, equity investments (stocks) tend to perform better against inflation than other types of investments because strong company pricing power can cause their earnings to adjust upward.


However, when you have the potential for higher returns, you also must prepare for the risks of investing in the stock markets. If you’re young and decades away from retirement, consider allocating a sizable percentage of your portfolio to stocks.


3. Make Sure Your Portfolio is Fully Diversified


Whether you’re young or closer to retirement, you want to ensure you have a diversified portfolio. Diversification can help to protect against risk.


Consider adding some inflation-resistant investments, including short-term bonds, Treasury Inflation-Protected Securities (TIPS), Series I Savings Bonds, and others. Inflation-resistant investments can help hedge against inflation, which grows in importance as you near retirement age.


Physical assets such as precious metals, artwork, and other alternative investments like cryptocurrency, NFTs, peer-to-peer lending, or foreign currency may tempt you. Yet, be sure you thoroughly understand their risks before putting your hard earned money in them.


Taking some risk for investment returns is essential to combat inflation. But the price volatility of several types of alternative investments may carry too much risk for your portfolio.


4. Invest in Real Estate


Real estate can act as a hedge because it tends to perform well during periods of inflation. If you’re a homeowner, your net worth likely increased because of skyrocketing home property values over the past year.


But there are other ways you can benefit from real estate investments to protect your long-term monetary goals and wealth.


Purchasing rental properties can be an effective way to grow your finances. Yet keep in mind that becoming a landlord is rarely as easy (or as profitable) as people make it out to be. If you want to be successful in the long-term, you’ll need to dedicate a lot of time to learning the rental market and managing rentals (or hiring management) before buying your first investment property.


Investing in real estate investment trusts (REITs) or crowdfunded real estate ventures are other ways you can benefit from the increasing commercial and residential real estate values without having to buy and/or manage the property yourself.


Protect Your Finances From Inflation


A rise in inflation can affect every area of your finances. While you cannot control inflation, you have control over how you handle your budget, spending, and investments in differing economic market conditions. By making changes now, you can protect your finances during high inflationary periods in both the short- and long-term. 


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