To Americans who weren’t around during the 1970s and 80s, the last true high inflation era, the U.S. economy might feel like a runaway train right now.
The Consumer Price Index rose 6.8% from November 2020 to November 2021 — the largest 12-month increase since June 1982. Everything from food and clothing to cars and housing utility rates are getting more expensive, and households are feeling the squeeze.
Part of the reason is that a steady stream of government aid throughout the pandemic helped many people make progress on their savings and debt goals. But now that inflation has rapidly slashed the buying power of the dollar, many people feel like they’re losing ground.
For 41% of Americans, the past year did not bring increased confidence or a sense of stability in their financial journey, according to the 2022 Wealth & Wellness Index by Personal Capital and Empower Retirement. A full two-thirds of survey respondents can not cover an unforeseen expense of around $100 without worry.
Inflation is Impacting Savings and Earnings
Only 38% of survey respondents report having a sufficient emergency fund, down 11% from 2020, according to the Wealth & Wellness Index. Whether they’ve dipped into their fund or left it alone in a savings account earning 0.50% or less (the typical current interest rate on a high-yield account), the result is the same: Their cash buys far less than it did a year ago.
Meanwhile, roughly one-third of Americans (32%) report being debt-free — a 7% decrease from 2020 — even though paying off personal debt remains a top goal.
When it comes to their overall financial health, 29% of surveyed Americans are feeling stressed. Unsurprisingly, almost half (48%) of those who experienced a negative financial impact due to the pandemic, such as job loss, are feeling stressed, compared to just 19% of those reporting a positive impact.
Americans weigh a number of factors when assessing their financial health — but none are as important as income. Overall, 44% of survey respondents agree that income is a top indicator of financial health, up 10% from 2020. Thirty-two percent said not earning enough is one of their biggest roadblocks to becoming financially healthy.
A record-setting number of Americans voluntarily left their jobs in November, with the largest increases in quits coming from low-wage industries such as hospitality and food services. Many people are strategically switching jobs to boost their earnings. In a summer 2021 survey of employed Americans, we found that 52% of those who traded employers did so for a higher salary.
Overall wage growth has been quite strong as a result of the recent labor market shake-up. But according to the Brookings Institution, most of the wage gains have been wiped out by inflation. It’s a good sign, however, that among our survey respondents, 73% are very or somewhat confident in U.S. job security overall.
So, how can you mitigate the effect of inflation on your finances? Here are a few tips.
Inflation should have no bearing on whether or not you have an emergency fund. What you should consider in high-inflation times is how much you keep in cash. Interest on most savings accounts is below 0.50% right now. Compare that to the 6%-plus inflation rate reported in November and your safety net is losing value fast.
For an emergency fund, calculate how much of your savings you’d need to get by for one to three months and keep only that much readily available in a checking or savings account.
For other big purchases that require cash, such as a future down payment on a home, consider buying a Series I savings bond to keep your money protected from inflation and earning a bit of fixed interest, without the risk of the stock market. The rate on Series I bonds purchased through April 2022 is an attractive 7.12%, at which point the Treasury will announce a new yield based on the inflation rate. Keep in mind there are liquidity considerations with these investments.
2. Mortgage and Other Debt
It’s always prudent to pay off high-interest debt, regardless of the inflationary environment. The average credit-card APR is about 16% — twice the typical return of a stock market investor. As you can see, becoming debt-free is a gateway to building wealth.
As for low-interest debt, such as a mortgage, staying the course during high inflation can be beneficial. Because many mortgage payments are fixed, you locked in a payment at the value of a dollar on the day you purchased the home. Assuming inflation continues to rise, even modestly, and your income rises with it, your mortgage payment will likely account for a smaller and smaller portion of your expenses.
So, instead of putting extra cash toward the mortgage now, consider investing it in the stock market to increase your buying power even further. Over 15 years, a $2,500 initial investment could potentially double, assuming a conservative 5% return.
3. Bonds and Bond Funds
Bonds act as a foil to stocks in a well-diversified investment portfolio by tempering risk and providing income. However, like cash, it’s important not to rely too much on bonds during periods of high inflation.
Consider steering your money toward bonds and bond funds with inflation hedges baked in. Treasury Inflation-Protected Securities (TIPS) are a good option to at least keep pace with inflation. And again, Series I savings bonds are paying an attractive rate through April 2022.
Read More: Financial Portfolios and How to Build Them
4. Real Assets
Real assets, such as real estate and commodities (i.e. oil and gold), are a smart diversification tool for investors. Rents and property prices tend to rise alongside inflation, making real estate investment trusts (REITS) — a lower cost way for everyday investors to invest in physical property — a good hedge against inflation.
As ever, stocks should remain the core of most investment portfolios. Despite rising inflation throughout 2021, the S&P returned nearly 27%. Of course past performance isn’t a predictor of future performance, but stocks are the best tool an investor has for not only beating inflation, but creating wealth over the long term.
Read More: The Average American’s Portfolio in 2021
There’s been talk about cryptocurrency as the inflation hedge (like gold) for the digital generation. But crypto doesn’t have enough of a track record — specifically, none at all during a high inflation period — to prove that it’s a solid inflation hedge. Bitcoin, the most valuable cryptocurrency, fell nearly 17% in a day in early December, losing about $10,000, proving its volatility even in purportedly calm waters.
Crypto remains a speculative — not to mention unregulated — investment that isn’t an asset everyday investors worried about inflation should run toward.
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* Survey Methodology: This survey was conducted by The Harris Poll on behalf of Empower Retirement and Personal Capital from October 29 to November 3, 2021. We surveyed 2,006 U.S. citizens ages 18+. This study also references data from prior research, including a study conducted from March 23, 2021 to April 8, 2021 with 2005 respondents; a study conducted from November 25, 2020 to December 11 among 2008 adults; and a study conducted from December 18 to December 30 among 2001 adults.
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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
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