Inflation remains a significant issue impacting Americans from all walks of life. Unfortunately, the cost of groceries, fuel, homes and other items continues to rise with no end in sight. Knowing how to manage your money during these uncertain times is necessary. The possibility of an economic recession is also likely, as preparing for these challenges ahead of time is key to staying proactive by giving you a financial safety net.
What is Causing Inflation?
Inflation often happens due to an imbalance in either supply or demand. However, this inflation period is unique from others in the past due to the economy experiencing pressures from both sides. COVID created numerous bottlenecks in the supply chain by causing a major slowdown in production. An elevated demand for products in this post-pandemic period also creates additional issues throughout the economy. Understanding how to manage your money in such a high inflation environment is essential to avoiding mistakes while helping you navigate these difficult times.
Where to Move Your Money During Inflation
Knowing where to move your money amid inflation is critical to protecting your resources. Unfortunately, finding the best place to invest your money can often feel overwhelming due to the different options. Learning more about all of these choices can help you decide that’s in your best interests.
Here is an overview of the best options for moving your money during inflation.
TIPS
Treasury Inflation-Protected Security (TIPS) are government bonds that help you weather the impact of inflation. The government also backs these bonds, and they mirror inflation. For example, the interest rates will rise whenever inflation goes up, and they will come back down once deflation happens. The cost of TIPS stays in line with the Consumer Price Index, as it’s an excellent inflation hedge for many people. TIPS bonds will pay interest two times per year at a fixed rate, and you can choose from 5, 10, or 30-year maturities.
Save Up Your Cash
Many people often overlook cash as an inflation hedge. While cash is not a growth asset, it will usually stay up with inflation due to the rise in short-term interest rates. It’s often recommended to use cash to pay off debt before building an emergency fund. A single-income household will need to set aside six to nine months of earnings, while two-income households can save up to six months to build an emergency fund. Of course, it can be a significant challenge to save money during inflation, as setting small goals while staying within your budget can help you save more cash over time.
Investing in Stocks and Bonds
Short-term bonds are another option for keeping your money safe and accessible. Investing in short-term bonds is better than long-term bonds because they are more resilient against rising interest rates. Putting money into the stock market is also an excellent long-term option for many investors. You can choose from numerous stock trading platforms. Reaching out to a financial advisor is a good idea if you need advice on buying bonds or investing in stocks. Following these tips can help you navigate the challenges of an economic recession while also avoiding common mistakes.
Buy Real Estate
Real estate often does better during a period of high inflation due to the ability to charge a higher rent. Investing in REITS (Real Estate Investment Trusts) is another viable option, as this allows you to invest in real estate companies. However, it’s essential to know that the real estate market may not act as similar in the past due to the post-pandemic era. The demand for retail and office spaces remains uncertain as many companies continue to implement work-from-home policies.
Other Things to Consider
Creating and sticking with a budget is essential to saving money. Paying off debt is also crucial in saving you money over the long term. Afterward, it’s important to create a rainy day fund available for you to handle emergencies. Once it’s built up, you may want to explore the bond market, as the government backs I-Bonds, and they are also tied to the Consumer Price Index.
Closing Thoughts
Knowing where to move money during inflation isn’t always easy. Investing in stocks and bonds, real estate, TIPS, and saving up cash are just a few of your many options. Learning more about the Consumer Price Index, I-Bonds, investing in REITs, and finding ways to reduce tax liability are vital aspects of managing the challenges of inflation. Focusing on diversified investments also provides an additional safety net during an economic recession. Ultimately, inflation will continue to create significant challenges, as following these tips can help you protect and grow your money during these difficult times.
