Inflation is a reality we can’t ignore, but we don’t have to let it derail our financial goals. If you’ve read these missives for a while, you know I always come back to the same principles: intentionality, awareness, and long-term thinking.
While inflation makes things more expensive, it’s our plan and the implementation of that plan that will determine our long-term success.
How we respond to rising prices matters, but really only at the margin.
Still, there are certainly some everyday optimizations we can point to that can help. Here are four key strategies to help you protect your long-term financial future during times of rising costs.
First, stating the obvious, we need to be mindful about our spending.
Inflation tightens the squeeze on our everyday budgets, so it’s important to optimize your spending without sacrificing what matters most to you. Start by tracking where every dollar goes – it’s about being conscious, not restrictive. You’ll likely find a few areas where you’re spending money on things that don’t serve you, like old subscriptions you’ve forgotten about or impulse purchases. Cancel those services or cut back where it makes sense.
One small but powerful habit? Cooking at home more often. Eating out frequently adds up, especially when prices are going up, but preparing meals yourself can save money and improve your health at the same time.
When you shop, be intentional: compare prices, use coupons (as a kid, I hated this… so much that as an adult I find it very difficult to bring myself to do it… but you can save a LOT of money with coupons), and buy in bulk when possible.
Even small changes like turning off lights (and teaching your kids to turn off the lights) or lowering your thermostat can add up over time.
Inflation erodes the value of cash, so it’s crucial to make sure your savings are at least maintaining purchasing power. We all have an emergency fund (right?) – make sure that emergency fund is working for you.
This is where high-yield savings accounts come in. If your money is sitting in a standard savings account, it’s likely losing purchasing power. By moving your savings into a high-yield account, you can at least offset some of that loss. Look for accounts with the best interest rates and be mindful of any fees or minimum balance requirements that could eat into your savings.
But, don’t sacrifice liquidity – access to your money without penalties. You want to be able to handle any unexpected expenses. And don’t underestimate the power of compound interest. Accounts that compound daily or monthly will help your money grow faster, even in a tough economic environment.
Debt, especially high-interest debt, becomes more expensive when inflation pushes up interest rates. That’s why one of the smartest moves you can make is to pay off debt aggressively. The quicker you can eliminate high-interest debt, the more money you’ll have to invest and save.
If you need a little motivation, try the debt snowball method – focus on paying off your smallest debts first. This gives you quick wins that build momentum. If saving money on interest is your top priority, the debt avalanche method is a better fit – it tackles the highest-interest debts first, saving you more in the long run.
Don’t overlook consolidation. If you have multiple loans, combining them into one with a lower rate simplifies things and saves you money – huge nod to making things simple. You might also consider talking to your creditors – they may be open to negotiating better terms, especially if you approach the conversation from a place of calm and honesty. To boost your debt repayment efforts, think about picking up extra income through a side gig or selling things you no longer need. Every extra dollar you put toward debt now frees up more money for your future.
Finally – you probably saw this one coming – when it comes to building long-term wealth, investing wisely is the most effective way to outpace inflation. Keeping your money in cash or “fixed income” isn’t an option – inflation will eat away at it. But by investing in a diversified portfolio of stocks (or, if you don’t like the passivity of stocks, then real estate), you can protect and grow your wealth over time.
The key is to stay focused on the long game. Don’t let short-term market volatility throw you off course. Markets fluctuate, but history shows them recovering time after time after time.
One strategy that makes investing simpler is dollar-cost averaging. By investing the same amount regularly, you avoid the temptation to time the market and reduce the impact of short-term swings.
I recommend low-cost index funds for their broad market exposure. Tax efficiency is another piece of the puzzle – strategies like tax-loss harvesting can help you reduce your taxable gains and keep more of your returns. And remember to rebalance your portfolio periodically to keep your investments aligned with your risk tolerance and long-term goals.
Inflation is a challenge, but when you have a plan, it’s more speed bump than roadblock. By being intentional with your spending, using high-yield savings accounts, paying off debt, and investing thoughtfully, you can stay ahead of it.
I believe that every financial decision should reflect your values and move you closer to your long-term goals. Inflation is just one more factor to navigate, but with the right mindset and strategies, you can continue to build the financial future you desire…
…and deserve.
