In the most basic sense, inflation is a rise in prices over time. The cost of everything, right from commodities like food to services like healthcare can go up during times of inflation. Kavan Choksi points out that when the prices increase, the purchasing power or the value of the currency goes down. Hence, as inflation “surges”, it would mean that each unit of currency today is worth less than it was just a few months ago. As a result, even if a person does not make any changes to their lifestyle or everyday purchases, the amount they spend shall be higher. This can put a noticeable strain on their budget.
Kavan Choksi highlights a few simple ways to save money during inflation
When inflation is high, people get worried about their savings and expenses. They try to find ways to combat inflation. Fortunately, with the help of proper planning and tips, one can actually save money during periods of high inflation. Here are a few tips one should consider following:
- Check the interest rates: If one does have a savings or checking account, they must make it a point to check the interest rates they are getting on the deposits. The national average savings rate for savings accounts typically falls below the current inflation rate. This means that the interest paid by the bank on the deposits might not be enough to combat inflation. If one is earning little to no interest on their savings or checking account, they should shop around for a better option. Earning more interest on savings accounts is an effective way to limit the impact of inflation.
- Consider opening a high yield savings account: When it comes to savings instruments, even though holding onto cash may seem counter-intuitive when inflation is going up, opening a high yield savings account would help people to limit the impact of inflation. Typically, a better-than-average annual percentage yield on deposits is offered on high yield savings accounts. Such accounts generally have compounded interest. This means that accumulated interest on the principal amount shall also earn interest. Hence, a high yield savings account can protect short-term savings, as well as the purchasing power of the dollar.
- Go a money market account: Having another savings vehicle may help limit the impact of inflation in a money market account. Much like savings accounts, money-market accounts may typically provide better-than-average interest rates, but do function in a manner similar to a checking account. As money-market accounts are popular for providing relatively competitive interest rates, they generally earn more interest by opening a money market account instead of a standard savings or checking account. Making sure that their money is earning as much interest as possible should be a priority for people when inflation is high.
Kavan Choksi mentions that even though the stock market may not seem like the right place to park money during inflation, panic selling stocks is not the right solution. While the stock market may suffer due to inflation, it historically tends to earn an average return of 8% to 10%. It is prudent to understand that even if past performance is not a guarantee of future growth, choosing to invest in the stock market after proper planning and research is a good way to grow retirement savings.