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How to Beat Inflation

When building wealth—which is just another way of saying “being financially secure”—time and where you keep your money can either work in your favor or against you. You may already know that investing comes with some risk, but saving also comes with some risk: losing the buying power of your money thanks to inflation.

Inflation is the increase of prices (for goods and services) and the decrease in purchasing power of money. The items you buy today will cost more in the future. The classic example is of a candy bar that cost $1.50 five years ago and now costs $2.00. If you had saved up $1.50 to buy that candy bar, you wouldn’t be able to purchase it now.

Usually, inflation creeps up slowly, and it may take a decade before you see a meaningful impact on your day-to-day finances. However, if you’re saving for a long-term goal (like retirement) and your money isn’t growing faster than the rate of inflation, your nest egg is actually losing value.

You don’t want to arrive at retirement or the date of another big life step only to realize costs have outstripped your money and you’re short on cash.

How to beat it

On average, an amount of money must grow by three percent each year to maintain the same value in the future. Depending on what you are saving for, there are a few ways to do this.

Balance risk of inflation with investments — Long-term, balanced investing in stocks, bonds, mutual funds, etc. is a good way to overcome inflation. Your risk tolerance should dictate your stock exposure and portfolio composition, but in general you’re likely to increase returns (and beat inflation) on your money with a passive investment strategy over the long term. Historically, stock market returns are eight to ten percent on investments of 20 years or longer.

Speak with a professional financial advisor to learn what strategy is best for you.

Invest in your retirement account — In the long run, the simplest strategy to beat inflation, and in regard to the biggest saving goal of most people’s lives, is to invest in a 401(k) or similar retirement account. Increasing your 401(k) contribution by only two or three percent will compound over time and can result in tens and hundreds of thousands more in returns. That puts a serious dent in the effect of inflation!

If you don’t have a retirement account through your employer, open and make contributions to an individual retirement account (IRA) or Roth IRA.

With retirement accounts, time is your greatest ally instead of your enemy.

Delay claiming Social Security benefits — Believe it or not, delaying collection of Social Security benefits until you’re 70 is a way to increase your retirement income and thus combat inflation. At the moment, you earn an eight percent increase in your benefit amount each year you delay collecting Social Security from full retirement age to age 70.

Again, it’s a good idea to meet with a financial planning professional to determine what makes the most sense for your situation.

Keep a healthy lifestyle — Health care costs can be some of the largest later in life, and those costs are rising faster than general inflation. Maintaining a healthy lifestyle with regular exercise, a balanced diet, and preventive healthcare will help you avoid those increasing costs.

Use high-yield savings accounts — Some of your money should be kept in an easily accessible savings account in case of emergency—but this doesn’t mean you have to admit defeat to inflation! You can split where you keep your savings between high-yield savings accounts and a series of certificates of deposit (CDs) or share certificates. These can match the inflation rate.

The best way to take advantage of certificates’ higher annual percentage yields (APYs) and still maintain access to your cash for emergencies or other investments is to “ladder” them. This is a method of setting up multiple certificates that mature at staggered intervals, allowing you access to part of your savings on a regular basis while keeping the rest in high-yield, longer-term certificate accounts. When a certificate matures, you have the choice to reinvest in another, or use it for other investments or an expense.

You have choices when it comes to avoiding “cash drag” and beating inflation. If you need help deciding which methods are best for you, talk with a financial planner or representative at your local credit union.