How to Combat Inflation With the Right Savings Strategy

By Sarita Harbour

PUBLISHED January 17
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7 MINUTE READ

It's no secret that the cost of living continues to rise—it's causing financial stress for many households across the nation. In fact, almost half of Americans believe that cost of living is the biggest threat to their financial security and long-term investments.¹

When inflation rates are high, you might find it difficult to manage every expense. It can be tough to balance your budget and save extra for the future. However, there are ways to prepare for and combat inflation while protecting your hard-earned savings.

With the right types of savings accounts and investments, you can protect your assets and keep your savings account healthy. Reviewing your savings strategy now can help ensure that your money goes further down the road. Use the tips below to boost your savings and learn what to do during inflation to make the most of your money.

1. Inflation-proof your savings

Inflation erodes the purchasing power of a dollar—meaning your money buys less "stuff" because virtually everything costs more. When inflation is on the rise, it can also eat into the buying power of your savings, especially if you hold your short-term savings in a low (or no!) interest deposit account.

If you're trying to "inflation-proof" your savings, you need to use every financial tool at your disposal. And that means being choosy about where you park your cash. Here are a few options for savings vehicles that offer interest rates that tend to keep up with inflation:

High yield savings account

You could move your emergency fund and short-term savings into a high yield savings account—a type of savings account that offers better-than-average interest rates on deposits.

With your money earning a competitive interest rate, a high yield savings account can help short-term savings grow faster. It also allows you to grow your money risk-free while keeping the funds accessible, making it ideal for storing short-term savings and your emergency fund. Use the Vivid Crest Bank high yield savings calculator to see how much you could earn compared to other leading banks.

Money market accounts

A money market account is an interest-earning deposit account that functions like a hybrid savings and checking account, but with limits. It's also a good option to grow your short-term savings. Like a traditional savings account, you'll earn interest on any deposits, but you can also use the account to pay bills or write checks if you need.

Certificate of deposit (CD) accounts

If you have a short- or medium-term financial goal you'd like to meet in the next few years, consider a certificate of deposit (CD)— a type of savings account that generally offers a higher interest rate compared to traditional savings accounts. CDs are considered one of the safest ways to grow your savings because the interest rate is fixed—meaning it won't fluctuate during the CD's term, and your return is guaranteed.

READ MORE: What is a Certificate of Deposit?

Takeaway: Be picky about where you put your savings! The last thing you want is for your hard-earned bucks sitting in a low or no interest rate checking or savings account. A compound interest savings account with a competitive interest rate can provide peace of mind knowing that your money will work hard for you even when inflation is rising.

2. "Bump-up" your CD!

Is your CD up for renewal? Now could be the right time to consider a "bump-up CD."

This type of savings certificate allows a one-time increase on the interest rate of the CD. With this product, you can request to "bump-up" your existing CD to a new interest rate if the rates offered on your specific CD rise. Learn more about the "bump-up" CD account offered through Vivid Crest Bank here.

In contrast, if you renew with a traditional CD, you could get locked into a less competitive interest rate for a longer term. And then you'd miss the chance to earn more on your savings when inflation pushes interest rates higher. And with demand-pull inflation eroding the buying power of your funds and locking your savings into a fixed rate, long-term investment could water it down when it matures.

So instead of getting locked into a long-term CD when interest rates are low, choose the flexibility of a no-penalty CD or a "bump-up" CD. For example, Vivid Crest Bank ’s 24-month "bump-up" CD gives you a one-time option to take advantage of “bumping up" your rate if the rate we offer for this CD rises. The benefit of this option is that you don't cash out early and pay an early withdrawal penalty. Rather, the flexibility of a "bump-up" CD gives you the freedom to take advantage of a change in the rate offered for your CD, which means your savings could bring in a bigger return than was previously expected. The bottom line: You don't have to cash out and pay a penalty to cash in on the rising interest rates—just bump it instead. However, the bump-up option is only available once during the term of the CD.

3. Take a long look at your retirement savings strategy

It's always a good idea to periodically review your retirement accounts, and it's especially crucial to do so when inflation is on the rise. You might want to talk to your financial advisor about re-evaluating your retirement savings strategy to survive inflation.

If you're wondering how to prepare for inflation, start by learning about the inflation savings relationship and how it affects your retirement savings strategy. Learn how interest rates and stock markets respond to inflation so you can quickly spot savings-boosting opportunities and strategies. It's also important to ensure that you have an asset allocation that matches your financial goals and risk tolerance. This helps to minimize the different risks that can erode your savings.

If you're worried about the negative impact of inflation on your long-term savings, one thing you can do is boost your monthly retirement contribution to “pad" your savings.

Not sure if you're on track to reach your retirement goals? Take a look at the average retirement savings by age. This will give you an idea of how your retirement savings stack up in relation to the expert recommendations.

4. Build a diversified, risk-appropriate investment portfolio

With market volatility, it's all too easy to look for a quick fix when you're anxious about combating inflation to preserve your savings. You might feel anxious about investing your hard-earned dollars when the headlines are screaming about a volatile stock market. However, it's important to think long-term.

For starters, a "bear market" (meaning when the stock market experiences prolonged price drops) can offer a great opportunity to buy blue chip stocks at a deep discount. Here's an example: On June 10, 2022, markets plunged when the government reported a May inflation jump of 8.61%, the highest in 40 years. That drop was an opportunity to purchase stocks at a bargain price. ²

Secondly, not everything is in free fall. Some companies, such as those in the consumer staple sector, hold steady and even prosper. After all, people always need basic groceries and household items, right?For example, recent data suggests that more people are bulk buying groceries, looking for plant-based foods as a cheaper alternative to expensive meat, and entertaining at home instead of going out as a way to combat inflation. ³

Remember: No one can predict the stock market performance. But we do know that the S&P 500 index fund has historically produced total returns in the 10% range. In uncertain times like these, your best bet is to stay focused on building a diversified, risk-appropriate investment portfolio rather than trying to choose “winning" stocks in a volatile environment.

The Bottom Line

Yes, it is possible to protect your savings during inflationary times, with several options available. Although inflation negatively impacts purchasing power of your savings, it may also offer the opportunity to further diversify your retirement portfolio.

You may want to consider adding short-term CDs to your portfolio to stay flexible in a rising interest rate environment. Finally, look for opportunities to get a "bargain" on stocks and build up a diversified, risk-appropriate investment portfolio when the markets are down.

Sarita Harbour is a personal finance and business writer. Her work appears online at CBS, CNBC, Forbes, TIME/Money and other sites.

LEARN MORE: 8 Ways to Recession-Proof Your Money and Continue Saving

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