How to Prepare for Inflation in 2024

Don’t let inflation catch your finances off guard. Take steps to help protect your money today.

In 2022, inflation hit a peak of around 8%, according to the U.S. Labor Department, resulting in higher prices for necessities, housing, and more.¹ While the rate has dropped since, averaging around 4% in 2023, consumers are still feeling the pinch and pressure to stretch their money.²

Though some inflation is almost always present, higher-than-average rates of inflation often impact your finances. Luckily, there are some actions you may be able to take.

Let’s look at how inflation hurts your purchasing power and ways you could help keep inflation from negatively impacting your finances.

Key Takeaways

• Proactive planning against inflation could help secure your spending power in the long run.

• Monitoring and adjusting your finances and investments regularly could help you combat inflation and live a richer life.

• Higher inflation rates may coincide with higher rates on deposit products, which could be used to your advantage.

How Inflation Hurts Your Buying Power

Inflation is the general increase in the prices of goods and services. The U.S. Department of Labor measures these changes with the Consumer Price Index (CPI), which calculates the average prices of products and services.³

Basically, inflation reflects a loss of purchasing power, meaning your dollar won’t go as far tomorrow as it did today. Think about it like this: a homebuyer looking for homes 10 years ago in the $300,000 to $350,000 price range had more, and potentially better, options than people with that same budget do now.⁴

Inflation could impact several areas of your finances: your grocery bill, utilities, entertainment, etc. Even the babysitter may start to charge more! That same higher rate may also cause mortgage, car loan, and personal loan rates, expressed as Annual Percentage Rate (APR), to increase.

The good news is it may also give you access to higher Annual Percentage Yields (APYs) on deposit products, such as high-yield savings accounts, which could help your money grow faster.

Tips to Protect Your Money from Inflation

Though you may not be able to mitigate the impacts that inflation has on the country at large, there are things you could do to protect your purchasing power when inflation is high.

Here are a few tips to keep in mind to help you get more from each dollar.

Take Advantage of High Rates

Inflation typically leads the Federal Reserve to increase the prime rate—the rate that financial institutions base their rates on. While higher prime rates may lead to higher APRs on loans and credit cards, it may also cause rates on savings accounts to go up as well.⁵

This could help your earnings keep pace with rising prices, particularly if you open a high-yield savings account. The average high-yield savings account has rates 10 times higher than traditional savings accounts.⁶

As of April 2024, the average national savings rate for traditional savings accounts was 0.46% APY.⁷ But high-yield savings accounts were earning 5.00% APY or higher.⁸

Note: the numbers in this chart are an estimation. They assume a steady APY, no additional contributions or withdrawals, and a daily compounding frequency.

Review the current rates your savings account is earning. If the rate is at the national average or below it, you may want to consider looking for a new savings account.

Review Your Salary and Raise Potential

When your compensation keeps pace with the inflation rate, you may not notice its impact as much. But when inflation spikes are higher than average, your salary, even with raises, may not be enough.

Keep an eye on your raises in relation to inflation rates to help make sure your current income is retaining or increasing in value.

If you feel like your income isn’t keeping up, you may want to do some research on salary ranges for your current position. This information could help you gauge if there’s an opportunity to discuss a salary adjustment with your employer.

Remember, you can’t get what you don’t ask for!

Address Credit Card Spending and Balances

Swiping your credit card to cover daily expenses as well as large purchases is often easy. But when rates rise, the APR on your credit card likely increases too. The higher the rate is, the more interest you have to pay if you carry a balance from month to month.¹⁰

This could cause your debt to grow faster and, if you’re not careful, may cause it to become overwhelming.

Try to make a habit of paying off your cards on time and in full each month. If you have a lot of high-rate debt, you may want to consider consolidating that debt with a consolidation loan. This could help you lock in a lower rate and/or lower your monthly payments.

Remember to look for rates that are lower than what you’re currently paying on your credit card. Otherwise, your payments could end up increasing!

Diversify Your Investments

Maintaining a diverse portfolio is often one way to hedge against inflation and help ensure that your investments continue to grow, even if that growth is at a slower rate.

You may also want to explore government-sponsored securities. Some of these investments adjust their interest payments with inflation-based rates that could also protect the value of the investment throughout its term.

Two examples of these types of investments include the following:

• Treasury Inflation-Protected Securities (TIPS): TIPS are investment bonds issued by the U.S. Treasury. They help hedge against inflation by adjusting the value of the principal throughout the maturity period. The interest payments made on these investments change with the market rate, but the principal’s purchasing power remains constant over time.¹¹

• Series I Savings Bonds (I bonds): I bonds help protect investors’ money from inflation by tying a portion of the rate to inflation. As inflation rises, the APY on the bond rises partially as well.¹²

As always, it’s best to consult with an investment or tax advisor when considering your options. They’re able to help you decide which investments are best for your situation and your financial goals.

Review Your Situation and Make Adjustments

When prices rise, it’s important to be intentional with your spending. This may make it easier to keep yourself on track to reach your financial goals. Get in the habit of tracking your spending and reviewing your budget regularly. As your income and expenses change, adjust your budget to ensure that it still aligns with your goals.

Increases to the prime rate may also mean increases to adjustable or variable rates on credit cards and some loans. If you’re carrying a balance on your credit cards, focus on paying down those debts as much as possible. This could help you spend less on interest and keep more of your money in your pocket (or high-yield savings account)!

Final Thoughts

When inflation causes financial strain, there are actions that may reduce its impact on your finances. Strategies like diversifying your investments, paying off debt, and building your savings with a high-yield savings account may reduce your stress and help you retain more of your purchasing power.

Reviewing your progress and making sure your budgeting efforts align with your financial goals could help you stay on track.

Need help establishing a budget that works regardless of the inflation rate? Check out our budgeting tips!