4 reasons to keep saving when inflation is high (2024)

FAQs

4 reasons to keep saving when inflation is high? ›

One of the advantages of high interest rates is that they reward those who save their money. By creating a balanced savings and investment strategy, you can take advantage of higher rates and put off some of those bigger discretionary spending choices until inflation starts to fall.

One of the advantages of high interest rates is that they reward those who save their money. By creating a balanced savings and investment strategy, you can take advantage of higher rates and put off some of those bigger discretionary spending choices until inflation starts to fall.

Elevated inflation discourages saving because it erodes the purchasing power of savings over time. That prospect can encourage consumers to spend and businesses to invest. Unemployment often declines at first as inflation climbs as a result.

Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Some specialized securities can maintain a portfolio's buying power, including certain sector stocks, inflation-indexed bonds, and securitized debt.

To survive inflation, consider spending or saving less, earning more, and using money wisely, especially if you're retired. Additionally, be mindful of taking on new debt and consider refinancing to fix your rates or consolidate existing debts.

Inflation can also erode the value of your savings over time. If you keep money in a traditional savings account — or in cash, for that matter — it'll lose purchasing power over time because your interest earnings (if any) won't keep up with inflation. So, what you save today won't go as far in the future.

Adding certain asset classes, such as commodities, to a well-diversified portfolio of stocks and bonds can help buffer against inflation. Be cautious about overallocating to cash, but make sure your emergency savings are keeping up with rising costs.

Monetary policy primarily involves changing interest rates to control inflation. Fiscal policy enacted through legislative action also helps. Governments may reduce spending and increase taxes as a way to help reduce inflation.

Who benefits more when inflation is high? ›

Key Takeaways

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Places to Keep Your Short-Term Cash

CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk. Learn how they compare in terms of yield, liquidity, and guarantees.

Put simply, wealthier people tend to get more from their dividends or interest on investments rather than from salaries. The impact of inflation on the former (dividends and interest) is far greater.

If inflation is, say, 5% and your savings account pays 1%, $1,000 in cash will be worth just $960 in a year. That means you're faced with watching your purchasing power dwindle—or trying to make up the difference by taking on extra risk, investing in much riskier assets like stocks.

Inflation measures the change in prices of goods and services in the economy. A drop in inflation means that prices are now rising more slowly. Combined with wage growth, this makes the cost of living more affordable, because you can buy more with the money in your pocket.

Inflation affects everyone in the economy, and it often imposes some costs, although it can also provide some benefits. High rates of inflation as well as deflation are problematic for an economy.

Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.