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More and more Americans are feeling the effects of rising inflation. A recent poll by the Pew Research Center found that inflation is the top concern for Americans, followed by health care affordability, violent crime and gun violence.
The July Consumer Price Index (CPI), which measures the cost of basic necessities, rose 9.1% over the past 12 months. With that in mind, here are a few steps you can take right now to protect your money from rising inflation.
How inflation affects your money
Inflation is the gradual increase in the prices of goods and services throughout the economy. It is measured by calculating the percentage change in a price index over a period of time, typically the last 12 months.
When inflation rises, it can cause headaches for consumers and businesses. For consumers, this can lead to higher prices and lower purchasing power. For companies, this can result in lower profits and higher costs.
5 ways to hedge against inflation
When inflation is high, you may find that your income isn’t what it used to be. But there are steps you can take now to hedge against rising prices.
1. Put your money into a high-yield savings account
If you have your money stashed away in a checking or simple savings account – or worse, at home – inflation will erode its value over time.
You can cut your losses by putting the money you can’t risk, like your emergency fund or home savings, into a high-yielding savings account.
Even the annual percentage return (APY) of the best high-yield savings accounts won’t keep up with the rate of inflation. But your money brings a higher return than other bank accounts. According to the FDIC, the average interest rate on savings accounts as of July 18 was 0.1% based on the most recent data available.
But for a high-yield savings account, APYs are as high as 1.5%. You can check out our picks for the best high-yield savings accounts to find one.
2. Buy government bonds
There are two popular types of government bonds that are good investments for people worried about inflation:
- Series I Savings Bonds. Series I bonds are interest-bearing government bonds. They are a low-risk option that pays interest and is protected from inflation. They have an annual interest rate based on a fixed rate and a semi-annual floating rate based on inflation. The Series I bonds issued between May and October 2022 have an interest rate of 9.62%.
- Inflation Linked Government Bonds (TIPS). TIPS are designed to help investors protect against inflation and TIPS are indexed to inflation. As inflation rates rise, TIPS adjust in price to maintain their value.
You can buy both types of government bonds at TreasuryDirect.gov.
3. Invest in the stock market
Inflation causes your money to be worth less over time. For this reason, it makes sense to keep the money you need in a liquid and easily accessible savings account, like an emergency fund. Other funds should be invested in the stock market to grow your money.
While the stock market can experience declines, it has historically produced returns that have outperformed inflation. Over the past 95 years, the average stock market return has been 12.3% per year.
You can invest through a retirement account such as a 401(k) or an Individual Retirement Account (IRA). You can also open a taxable brokerage account. If you’re not sure where to start, you can use investing apps to help you choose investments and manage your portfolio.
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4. Diversify your portfolio
When investing in the stock market, it’s important not to just invest in a handful of stocks. If a company fails or falls in price, you could lose significant money.
The diversification of the portfolio lowers the risk. When one company performs poorly, the performance of others can offset its losses and minimize the impact on your money.
Fidelity Investments, a multinational serving over 40 million investors, recommends the following for a diversified portfolio:
- Domestic Stocks. Domestic stocks are stocks of American companies. Many US stocks have a history of delivering solid returns, so domestic stocks are a cornerstone of most portfolios. Although you can invest in individual stocks, you can also use a broad market index fund to invest in many domestic stocks.
- International stocks. With international stocks you invest in foreign companies. Companies based in other countries often perform differently than US companies, giving them the potential for higher returns. However, there is also the potential for higher risks.
- Bind. Most bonds tend to be less volatile than stocks, offer regular interest income, and protect against market volatility.
- short term investments. Short-term investments include certificates of deposit (CDs) and money market funds. These are very conservative investment options that offer lower returns than stocks but are less risky than other options.
5. Explore alternative investments
If you already have savings in a high-yield savings account, invest in the stock market, and have a diversified portfolio, you may want to consider alternative investments to hedge against inflation. Popular alternative investment options include:
- raw materials. Commodities are raw materials used to manufacture consumer goods. These include agricultural products, metals, crude oil and natural gas.
- property. Many investors buy property investments to take advantage of housing demand and beat inflation. Buying real estate is one way to invest in real estate, but buying shares in a public real estate investment trust (REIT) is much more liquid and easier to acquire.
- gold and precious metals. Investors concerned about the declining value of a dollar may be interested in buying gold or precious metals. The price of gold and other precious metals is generally independent of other asset classes.
When inflation rates rise, it’s a good idea to review your finances and see if improvements can be made to protect your money. Investing in stocks, bonds, and other traditional investment vehicles can help you counteract rising inflation.
If you want to explore alternative investments, you have several options. Whichever route you choose, it’s important to diversify your portfolio to minimize the risk of losing money if an investment performs poorly.