Protect your Money from Inflation

Should I be excited that my car now holds $80 worth of gas when it used to hold just $40?

All jokes aside, the inflation rate lately has been no laughing matter, with overall prices up 3.8% in the past year, and gasoline up over 50%. If you’ve come to one of my tax strategy presentations, you may have seen my slide where I identify inflation and taxes as the two biggest wealth killers – and then I go on to say there’s not much we can do about inflation except to stop buying stuff, but that there’s a LOT we can do on the tax side with legal money-saving tax strategies, yada yada.

BUT – there actually are a few things we CAN DO to position our money for high inflation. At our Wealth Wednesday session earlier this month, Caitlin and I discussed what causes inflation, what it does to our wealth, the tools the government uses to control it, and how we can protect and hedge against it. This is really important right now, as the high price of oil is raising the cost of almost everything – whether directly or indirectly. And we probably haven’t even seen the bulk of those ripple inflation effects yet. 

So how do you keep inflation from eroding your wealth?

1)        Add Inflation-Protected Securities to your portfolio

Treasury Inflation-Protected Securities (TIPS) and I-Bonds are two government-backed investments that adjust for inflation, helping protect the purchasing power of your money as prices rise. They were literally designed with inflation in mind.

The downside? While they can help prevent inflation from eating away at your money, they're unlikely to generate the kind of long-term growth you'll get from assets like stocks or real estate. You should think of them as ‘stabilizers’ in your portfolio.

2)        Invest in Inflation-Resistant Assets

When inflation is making everything more expensive, one way to fight back is to own the things that are becoming more expensive. Real estate, stocks, and commodities have historically been good inflation hedges because their values often rise along with prices in the economy.

You can also invest in companies that sell products people can't easily stop buying. Energy, oil, food, household goods, and other consumer staples remain in demand whether prices are high or low. After all, nobody wakes up and decides inflation means they're done buying toilet paper. (We learned during the pandemic just how seriously people take their TP!)

3)        Consider Cash Alternatives

Many people think cash is the safest place for their money. The problem? Inflation treats cash like an all-you-can-eat buffet. (YUM!)

Your great-grandparents might have tucked $200 under the mattress and felt rich. If you uncovered that same $200 today, you'd probably spend most of it filling up your gas tank and buying a couple bags of groceries. The dollars are still there, but they just don't go nearly as far.

A good goal is to try to hold your cash and emergency savings somewhere that is liquid, but earning at least around the current inflation rate in interest. This could include a high-yield savings account (HYSA), money market, or short-term bonds.

If spending $80 to fill your tank makes you nostalgic for the good old days, remember that inflation may be winning a few battles, but it doesn't have to win the war.

Just make sure your money isn't sitting under the mattress waiting to become a very expensive cup of coffee for your grandkids. ☕️

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