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Five tips for protecting your money during high inflation

During periods of high inflation, rising costs can be a source of stress. But with a few changes to your financial plan, you can lessen the impact on your household budget. 

5-minute read

In brief 

  • In times of inflation, prices increase and the value of currency decreases. 
  • Keep the money you set aside for the future in an account that earns interest. 
  • Identify expenses that can be trimmed by tracking your spending. 
  • Focus on paying down variable rate loans. 
  • Choose a credit card that offers rewards to get more value out of your purchases. 

What is inflation? 

Put simply, inflation is a rise in prices over time. In times of inflation, the cost of everything from commodities such as food and housing to services such as health care can rise. A degree of inflation is normal over time. Inflation is why, for example, an item that cost $1.00 in the 1920s would cost about $18.00 today. 

As prices increase, purchasing power (or the value of currency) consequently decreases. And when inflation “surges,” it means that each unit of currency today is worth less than it was just a few months ago. Even if you make zero changes to your lifestyle or everyday purchases, the amount you spend will be higher. 

This can put a noticeable strain on your budget. It might also cause you to worry about your savings, as the money you’ve put away decreases in value. Fortunately, there are a few steps you can take to mitigate inflation's impact. 

1. Evaluate your savings 

Where you keep your money can have a significant impact on how much that money is worth over time. Keep the money you set aside for the future in a savings account that earns dividends so that your balance gradually increases over time. This can be an effective way to combat inflation. 

If you have some money you won't need to access immediately, consider share certificates. The money you deposit in a share certificate grows over a fixed term, often at an even higher rate than a savings account. 

Keeping your money in savings and share certificate accounts is a wise place to start in protecting yourself from inflation. 

2. Track your spending 

When costs are on the rise, every bit that you're able to save counts. Tracking your spending is a great way to make sure that you're using your money as effectively as possible. Also review your bank and credit card statements from the last few months to determine where there's room to cut back. 

Are you: 

  • Paying for a streaming service you don't watch/listen to? 
  • Going out to eat more than you cook at home? 
  • Paying for a gym membership that hasn't been used in more than a few months? 

Trimming this discretionary spending doesn't need to make a major difference in your day-to-day life, but can reduce strain on your budget. 

3. Prioritize paying down high-interest debt 

As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly. 

For most consumers, the biggest impact of these rate hikes is on credit cards. If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have and paying off your balance each month if you can. 

That said, you don't need to be in a rush to pay off all of your debt. If you have a fixed rate mortgage, for example, your interest rate was locked in at the time of closing and won't be impacted by rate hikes. In fact, the interest rate on your mortgage may actually be lower than the rate of inflation — meaning it's a safe financial choice to continue paying it off over time. 

Instead, focus on paying down variable rate loans (including credit cards). When rates increase rapidly, your minimum payment may only cover the interest without any money going toward the principal. Payments that go beyond the minimum amount can help you pay off debt faster. 

4. For new mortgages, consider an adjustable rate 

When interest rates are high, a mortgage where the rate is subject to change may seem like a surprising choice. What makes an adjustable rate mortgage (ARM) a smart choice for a new mortgage during times of high inflation? 

With a fixed rate mortgage, your rate is locked in for the life of your mortgage. If rates begin to fall, the interest rate on your fixed rate mortgage will stay the same. With an ARM, you can benefit from those falling rates. Your interest rate will decrease as the index used to calculate it decreases. Your rate can also go up with an ARM, but at UNFCU you are shielded from wide fluctuations with a cap on how much your rate can change. 

5. Take advantage of rewards 

Even with a well-managed budget, you'll likely be spending a bit more than usual when inflation is high. Though this can be frustrating, you can make the most of the extra costs by choosing a credit card that offers rewards. Pay off your full balance each month to take advantage of these benefits without owing interest on your purchases. 

With UNFCU Azure and Elite cards, for example, you accumulate reward points with every dollar you spend. These points can later be redeemed for cash, airfare, and hotel stays — helping you get more value out of every purchase you make. 

Further reading

Options to save for the future at UNFCU include savings accounts and share certificates

The 50-30-20 rule is just one way to consider organizing your budget. To find the perfect fit for your situation, consult a professional financial planner.

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