How can you protect yourself financially during inflation?
Inflation—the rise in consumer prices—is an erosion of your money over time. Before 2021, annual core inflation in the US hadn’t exceeded 3% for the better part of 25 years. In fact, our country has actually gone through many brief periods of deflation, which is the opposite of inflation.
However, economic progress is usually accompanied by inflationary pressures. Inflation may occur when there’s too much money in the system, which results in an escalation in the price of goods.
Financial experts refer to inflation as the “worst tax,” as its effects often go unnoticed by most people. Hypothetically, earning 5% in a savings account while inflation grows at 8% makes many feel 5% richer. In fact, they’re 3% poorer.
The impact of inflation is felt throughout an economy. As prices go up, what you can purchase now will decrease over time. That’s why it’s important to know how to protect yourself financially during inflation.
According to experts, the US economy is still in the post-pandemic inflation trenches, with prices unlikely to return to pre-pandemic levels anytime soon. Food and home prices went up 3.6% over the past year, while food at restaurants increased 7.1% over that period.
With the current economic situation that seems to linger, many people feel worried about the possibility of a recession. The good news is that with the right mindset and strategies, you can protect yourself financially during inflation and, if that’s the case, during a recession.
Here’s how you can stay financially stable during an economic downturn!
1. Create multiple streams of income
One of the best ways to protect yourself financially during inflation is to have multiple sources of income. Diversifying income streams means generating money from different sources, so you’re not solely reliant on one income stream.
By doing that, you’re spreading out the risk and reducing the potential losses in the event of a market downturn, business closure, or job loss. For instance, someone with income from part-time work, investment income, and rental properties is less vulnerable to economic volatility than someone whose only income stream comes from their full-time job.
If you want to protect yourself financially during inflation, consider this strategy. It may require some investment in the beginning, not to mention effort, but it can provide a safety net and help protect your financial future when times get tough.
2. Pay down high-interest debt
Another strategy to protect yourself financially during inflation is to pay down high-interest debt. Whether it’s a personal loan or credit card balance, high-interest debt can quickly get out of control and affect your monthly budget. By making additional payments toward your debt, you can reduce the amount owed and lower your monthly expenses.
Not only will this help with cash flow, but it will also reduce stress. According to therapists, money is one of the main stressors for American adults. Moreover, paying off debt will also help you improve your credit score, which will make it easier for you to access credit when needed.
While making extra payments may be challenging at first, the long-term benefits are definitely worth it.
3. Build an emergency fund
No. 3 on our list of ways you can protect yourself financially during inflation is something we all should do. According to financial experts, having an emergency fund you can use to cover unexpected expenses is one of the wisest financial decisions you can make.
Creating an emergency fund means saving money to rely on in case of unforeseen expenses such as a car repair, health emergency, or job loss. Ideally, the amount you save should help you live off it for at least three to six months.
Having an emergency fund can help you protect yourself financially during inflation and provide you with a buffer during tough times. Not to mention, it also reduced the need to rely on loans or credit cards, which will only increase debt.
It can also be a comforting feeling to know that you have money set aside for unexpected circumstances that may arise, helping you remain focused on your long-term financial goals.
4. Invest in your education and skills
Another strategy to protect yourself financially during inflation is something you may not have thought about until now. Learning new skills, attending workshops, and taking courses can make you more valuable in the job market, boosting your job security and earning potential.
Moreover, doing this can also open up new career opportunities and direct you toward a new industry if needed. Investing in yourself is also known to boost your self-esteem and confidence, providing a sense of control during an economic downturn.
With the rise of online learning and remote work, there are lots of accessible and affordable options to consider. So, if you have a hobby that you think may bring you some extra cash, why not take some courses? Not only will it bring you a sense of satisfaction, but it will also help you protect yourself financially during inflation.
5. Cut unnecessary expenses
The next strategy on our list of ways to protect yourself financially during inflation aims to evaluate your spending habits and make wise choices. Cutting back on expenses is different for each of us. Whether it’s canceling subscriptions you don’t use, downgrading your internet package, or reducing dining out, it’s important to pay attention to those things that drain your wallet.
These are small changes that can add up, and you’ll be surprised at how much money you can save. Keep in mind that every penny counts. It’s always a good idea to cut back on unnecessary expenses. It will help you create a stronger financial foundation for the future and protect yourself financially during inflation.
6. Network and build relationships
In times of economic uncertainty, having a robust network can help you find new clients, job opportunities, or partnerships. Networking can also provide valuable perspectives and insights into various markets and industries.
So, in order to protect yourself financially during inflation, consider joining professional associations, attending industry events, or connecting with thought leaders in your field through emails, social media, or other networking platforms.
Staying on top of your network and building a solid reputation can make a difference when securing new business opportunities or landing a job in a tough economy.
Read on to discover other ways to protect yourself financially during inflation!
7. Start a side hustle
Another strategy to protect yourself financially during inflation is to start a side hustle to create another stream of income. By generating extra income through a side business, you build a safety net that can help boost your financial stability even during difficult times.
Starting a side hustle and earning extra cash doesn’t need to be complicated; it could be something as simple as offering tutoring services, selling goods online, or freelancing in your field of expertise.
The important thing is to choose a side hustle that puts your skills and interests to work and works for you and your lifestyle.
8. Focus on essential needs
Next on our list of ways to protect yourself financially during inflation is to distinguish between needs and wants. Consider prioritizing your expenses and only spending money on things necessary for your livelihood, such as shelter, food, healthcare, and transportation. This is especially important during difficult economic times, when your income may be reduced.
By focusing on essential needs, you can slash your expenses and stretch your budget further, providing financial security and stability.
Keep in mind that treating yourself from time to time is okay, but prioritizing essential needs can help you protect yourself financially during inflation and help you manage your finances in the long run.
9. Invest in stocks
No. 9 on our list of strategies to protect yourself financially during inflation is to invest in income-generating assets. Whether it’s stocks, bonds, or real estate, these types of assets can help you earn extra cash flow, even in a down market.
Despite the lack of confidence most people have when it comes to stocks, owning some equities can be a great way to fight inflation. Think of your household as a company. If a business cannot properly invest its money in projects that will bring a return above its costs, then it will fall victim to inflation.
The main premise of business success is that companies will sell their goods at increased prices, which will eventually lead to elevated earnings, revenues, and, inevitably, stock prices.
Some of the best stocks to own during inflationary times are in companies that can hike prices naturally during inflation. One example would be commodity resource companies. Products like metal, grains, and oil enjoy power during periods of inflation.
The prices of these products tend to go up as opposed to, for instance, the price of a computer, which is subject to distributor and manufacturer price adjustments.
It’s important to remember that all investments come with risk. However, investing in assets that generate income can help you protect yourself financially during inflation and provide you with security during tough times.
Here’s a book about money and the psychology behind it that can help you understand more about one of life’s most important topics and make better financial decisions.
10. Stay healthy
When you’re healthy, you are more likely to be productive and have the mental focus and energy needed to make intelligent financial decisions. A healthy lifestyle includes a balanced diet, enough sleep, and regular exercise. You may think doing all these things won’t help you protect yourself financially during inflation, but in order to face financial challenges, you need to be healthy.
Taking care of your mental health is equally important, so remember to make time for relaxation. A healthy lifestyle can help improve your mood, reduce stress, and boost your overall well-being, enhancing your ability to weather financial challenges. Give your body and mind a break to recharge your batteries, and you’ll have more energy to achieve your financial goals.
11. Evaluate your insurance coverage
No. 11 on our list of ways to protect yourself financially during inflation is to review your insurance coverage. Insurance can help you cover some expenses in the case of an unexpected event like an illness, accident, or job loss. Make sure you have auto insurance, health insurance, and disability insurance at a minimum.
It’s a good idea to evaluate your insurance coverage at least once a year to make sure that your family as well as your belongings are appropriately protected. Financial experts also recommend reviewing your coverage any time you’ve made a major purchase or experienced an important life event, such as buying a house, getting married, receiving an inheritance, or sending your child off to college.
Consider getting additional insurance coverage depending on your circumstances, such as umbrella insurance or life insurance. Having adequate coverage helps provide you with peace of mind and protects you financially during inflation.
12. Invest in a home
Another thing you can do to protect yourself financially during inflation is to invest in a home. When done for the right reasons, like purchasing a house to live in, real estate is always a good investment.
Issues arise when a buyer’s goal is to flip the property they just purchased at a profit. Although real estate investors with experience are able to find hidden values in properties, the average individual should focus on buying a house with the purpose of holding it, even if only for a couple of years.
It’s important to keep in mind that real estate investments don’t usually generate a return within several months; they require a longer waiting period in order for values to go up.
Like land, home prices tend to grow in value on an average year-over-year basis. It’s true that real estate bubbles are generally followed by correctional periods, sometimes causing properties to lose over 50% of their value. Still, on average, housing prices tend to go up over time, counteracting the effects of inflation.
13. Try to bring more money in
Another way to protect yourself financially during inflation is to look for ways to bring in more money. Apart from creating multiple streams of income, another strategy to earn extra cash is to search for financial institutions that pay higher interest rates than what you are making now (if you’re generating anything at all).
Credit unions and online banks often offer high-yield savings accounts that boost returns, especially as interest rates increase.
Perhaps the most powerful idea of all to protect yourself financially during inflation is to ask for a raise. If you haven’t received one in a few years, you’ve most likely experienced what amounts to a pay cut due to inflation.
14. Maximize tax efficiency
Tax efficiency is when a person or business pays the least amount of taxes they are required by law to pay. A financial decision is believed to be tax-efficient if the tax outcome is lower than an alternative financial decision that achieves the same end.
So, another strategy to protect yourself financially during inflation is to maximize tax efficiency. This method refers to structuring an investment so that it gets the least possible taxation. There are several ways to secure tax efficiency when investing in the public markets.
You can open an income-producing account where the investment income is tax-deferred, such as a 401(k) plan, an Individual Retirement Account (IRA), or an annuity. Any capital gains or dividends earned from the investments are automatically reinvested in the account, which keeps growing tax-deferred until withdrawals are made.
You can calculate tax efficiency by deducting the amount of tax from the return to calculate the net return. Then divide the net return by the gross return.
15. Keep a positive mindset
Last but not least on our list of ways to protect yourself financially during inflation is something you should always keep in mind: no matter how tough it may be to deal with financial struggles, remember that tough times don’t last forever.
A positive mindset can help you focus on solutions, stay motivated, and ultimately weather the storm. Whatever your situation, there’s always something that you can try to do to build a more secure financial future for yourself and your family. Having a positive outlook enables you to cope better with financial stress and achieve your goals.
If you liked our article on ways to protect yourself financially during inflation, you may also want to read Top 8 Cheapest US States to Live in.
