Ways to Protect Your Money from Inflation in 2023
Don’t let inflation catch your finances off guard. Take steps to protect your money today.
Are you feeling the effects of inflation and looking to protect your financial wellbeing? You’re not alone. The COVID-19 pandemic played a strong role in rising costs in the U.S. and is still contributing to lingering economic disruption.
Inflation hit a peak of around 9% in 2022 during the pandemic, according to data from the U.S. Labor Department, and has dropped to 6% in March 2023.1Even with this drop, many are still feeling the pinch.
Some sort of inflation is almost always present in the U.S. In fact, the Federal Reserve aims for an inflation rate of 2%.2 That said, when inflation is higher than expected, there are some actions you can take to help protect the value of your money and maintain your purchasing power. Let’s talk about them!
Proactive planning against inflation could help secure your spending power in the long run.
Monitor and adjust finances and investments regularly to combat inflation and live your richest life.
Higher inflation rates may coincide with higher interest rates, but these higher rates could be used to your advantage.
How Inflation Hurts Your Buying Power
If you notice your grocery bill creeping up or notice interest rates rising, you’ve spotted some common signs of inflation.
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
Tips to Protect Your Money from Inflation
There are several steps you can take to protect your purchasing power during inflationary times. Some of these include diversifying your assets and using higher interest rates to your advantage.
Take Advantage of High Rates
Sometimes high rates are a good thing! In fact, during times of higher inflation, many banks will offer higher rates on deposit accounts, which can help your earnings keep pace with rising prices. A high-yield savings account can have rates 20 to 25 times higher than a traditional account.5
Most digital banks offer rates that are significantly higher than the average. In fact, in March 2023, the FDIC reported that the average national rate for savings accounts was 0.37% APY,6 whereas most online savings accounts were offering rates over 3.00% APY.7
Traditional Savings Account
Digital Savings Account
Interest earned in one year8
Note: The numbers in this chart are just an estimation and assume a steady Annual Percentage Yield (APY) and monthly compounding frequency.
Take a few minutes to check the current rates on your savings account. If the rate is at the national average (or even below it!), you may want to consider looking for a new savings account.
Review Your Salary Raises
There have probably been times in your life where you haven’t really noticed inflation because your compensation kept pace with the inflation rate. It’s common for employers to increase salaries as costs rise.
When inflation spikes are higher than average, raises may not keep up with these times and employees’ purchasing power is reduced. It’s a good idea to keep an eye on your raises in relation to inflation rates, as this helps you make sure your current income is retaining the same value.
If you feel like your income isn’t keeping up, you might want to do some market research on salary ranges for your current role. This information can help you gauge if there is 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
When costs rise, it’s common for us to make more purchases using our credit cards. Unfortunately, this can cost you in the long run due to the variable rates charged by credit cards.
The average credit card rate has been continually rising since 2021, hitting 20.09% APR in Q1 2023, according to LendingTree.9 If you were to carry a balance of $5,000 on a credit card with that rate for just one month, you’d owe $83.22 in interest.10
Carrying a balance from month-to-month causes debt to grow quickly and it can get out of hand. Try to make a habit of paying off your cards on time and in full. If you have a lot of high-interest debt, such as credit card debt, you might want to consider consolidating your debt with a debt consolidation loan.
Check on Variable Rates
A variable rate is one that rises and falls based on certain market conditions. This means you will pay a different amount while the account is open depending on the current rate.
Almost any line of credit or debt can have a variable rate, including mortgages, credit cards, personal loans, and auto loans. If you have accounts with variable rates, you may want to check on the current rate to determine how much you are paying.
When variable rates are high, you may want to open a fixed-rate personal loan and use the proceeds to pay off high-interest debt.
The fixed-rate personal loan will then allow you to plan for a consistent rate and payment for the loan’s duration, and oftentimes help you save money in the long run if the loan has a lower rate than the debt you paid off.
Diversify Your Investments
Are you investing all your money in one asset class? It may be time to diversify your holdings to take advantage of different investment types, including stocks, bonds, mutual funds, and ETFs.
One relatively safe investment during times of higher inflation is government-sponsored bonds and securities. Since these assets are backed by the U.S. government, they are seen as one of the lowest risk investments available in terms of payback. But bonds that adjust their interest payments with inflation-based rates could help also protect the value of the investment throughout its term.
Two examples of these inflation-buster investments include TIPS and I bonds:
Treasury Inflation-Protected Securities (TIPS): TIPS are investment bonds issued by the U.S. Treasury that aim to provide protection against inflation.11 The bond’s principal and interest payments adjust for changes in the CPI to help ensure the bond’s purchasing power remains constant over time.12
Series I Savings Bonds (I bonds): I bonds help to protect investors’ money from inflation by tying part of the interest rate to inflation. They became particularly popular as inflation rose during and after the COVID-19 pandemic.
As always, it’s best to consult with an investment or tax adviser when considering investment options to determine the best one for you.
Monitor & Make Adjustments
Regularly fine-tuning your financial decisions could make all the difference on your financial health journey.
When prices are rising, it’s important to be intentional with your spending to make sure your financial goals are still on track. Even if you’re a disciplined budgeter, you may still want to reevaluate your budget as your income and expenses change.
Another important adjustment to make during times of high inflation is paying off accumulated debt, if you’re able to. This helps you reduce the amount of interest you pay over time and the overall cost of your debt.
Additionally, it's important to stay informed about the current financial climate, as well as research ways to improve your current financial situation. If you find that you’re not getting the most out of your money, consult a finance specialist to help you.
When inflation causes financial strain, there are strategies you can use to cope with it. These strategies may include diversifying your investments, paying off debt, and increasing your savings.
Protecting your spending power is all about building habits that respond both to the present while keeping your future goals in mind.