How to Beat Inflation

Inflation is something that occurs naturally over time, sometimes quickly, sometimes slowly. In times of low inflation, you may not notice much of a difference in prices from one month to the next. 

But when prices are climbing rapidly, it hurts. You can’t buy the same amount of stuff with $20 today compared to just a few years ago. If you learn more about how inflation works, it’s easier to manage the impact and keep your financial plan on track. 

Here's a closer look at how inflation works and some of the best strategies you can use to combat it.

What Is Inflation?

The inflation rate is the speed at which prices for goods and services increase. It means you have to pay more than you used to for the same items.

How do we calculate inflation? The Consumer Price Index (CPI) is the most widely used measure of the inflation rate. The U.S. Bureau of Labor Statistics measures price changes for urban consumers (people who live in cities). This group represents over 90% of the U.S. population. The BLS analyzes the prices of items and services in more than 200 categories, such as: 

• Gasoline

• Groceries

• Medical appointments

• Entertainment

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How Does Inflation Affect Debt?

The main way that inflation affects debt is that when the things we need cost more, it might take longer to pay off your debts. Inflation stretches everyone’s budget. If you’re trying to pay off your debt, or if you were already struggling to keep up with your payments, inflation could lead to a situation where your money just doesn’t cover all your needs anymore. That could lead to needing debt relief.

Inflation also affects the cost of debt, but a lot depends on the type of debt you're talking about. 

Fixed interest rate debts

Fixed-rate debts are those with interest rates that stay the same for the life of the loan. Fixed rates are normal for most mortgages and personal loans. These debts aren't directly affected by inflation because the lender sets your interest rate when you first get the loan.

If you refinance a fixed rate debt—that is, if you take out a new loan to pay off the old one—your interest rate could change. If inflation is high, your new interest rate may be higher than the old one. That’s why it's a good idea to avoid refinancing unless rates are lower than the rate on your original loan.

Adjustable-rate mortgages and home equity lines of credit (HELOCs)

Interest rates on adjustable-rate mortgages and home equity lines of credit (HELOCs) can change over time and could go up during inflation. However, interest rate ceilings protect you from significant rate spikes.

Ceilings limit the interest rate on variable rate loans in two ways: 

• An adjustment cap limits how high an interest rate can go during a specific adjustment period. A 2% limit for an annual adjustment is common. 

• A lifetime cap sets the maximum rate of a loan. One common limit is 56% over the loan’s start rate. If your loan has this lifetime cap and your original rate was 6%, your rate can never go above 9.36%.

Credit card debt

Credit cards typically have variable interest rates that can change over time. Credit card issuers can’t increase your interest rate within the first year that you have the card, and they have to give you 45 days of notice if they raise your rate after that. 

In reality, people’s credit card rates go up and down all the time. Here’s why. 

When you get a credit card, the contract you sign with the credit card issuer states how your APR is set. For example, it could be the prime rate plus a certain number of additional percentage points (such as “prime plus 8%”). When the prime rate changes, your credit card issuer doesn’t have to notify you before changing your rate. That’s because they aren’t raising your rate. It’s still “prime plus 8%,” which is what’s in your contract. Only the prime rate changed.

Other times credit card issuers can raise the interest rate on your existing balance include: 

• A promotional period ends (for example, a 0% introductory APR period when you open the card account).

• Your minimum payment hasn't been received within 60 days of its due date.

How to Beat Inflation When You Have Debt

It’s possible to pay off debt even in the midst of high inflation. You just need the right strategy. 

Focus on your variable-rate debts with the highest APRs first 

If you're not sure what your debt balances and interest rates are, gather this information from your creditors first. Note the balance, the interest rate, and the payment due dates for each debt, then rank them in order from the highest interest rate to the lowest interest rate.

The debt avalanche method is one strategy that works well for those with credit card debt on multiple cards. You pay the minimum amount on each of your cards every month to avoid late fees and credit score damage. Then, you send any extra cash you have to the card with the highest interest rate. You do this until it's all paid off before moving onto the card with the next-highest interest rate. 

Consolidate your debts

If you qualify, you could also consider taking out a fixed-rate loan to consolidate variable interest-rate debts. This could be a personal loan or a home equity loan. An installment loan could help you break the credit card debt cycle, and get a firm payoff date for your debt. 

Another option is a zero-interest balance transfer credit card. These cards don't charge any interest during the special 0% introductory APR period. The length of this promotional period varies by card—usually 12 to 18 months. It's a smart strategy if you feel confident you can pay off all the debt before this promotion expires. Keep in mind that any remaining balance when the 0% APR period ends will begin to accrue interest.

Get professional guidance

Consult a credit counselor if you could use professional help and guidance getting a handle on your finances. They might recommend a debt management plan (DMP), where you stop using your credit cards and pay them off in three to five years. Credit card issuers may be willing to lower your interest rates to help you make progress if you’re willing to commit to the plan.  

Settle your debts for less than the full amount

Debt settlement means negotiating a lower payoff for your unsecured debt accounts (like credit cards). Creditors aren't obligated to allow this but many will if you demonstrate that you can’t afford to fully repay your debts. A debt expert at Freedom Debt Relief can explain how it works.

How to Beat Inflation With Savings

If you put a dollar in your pocket today, it’ll soon be worth less than a dollar. The same is true for money you leave in typical bank savings accounts that pay an interest rate that’s only a tiny fraction of one percent. Big banks often pay 0.01% interest. That’s one one-hundredth of one percent. If you leave $100 in the account for one year, you’ll have $100 plus one cent.

Put your money where it'll do you the most good. 

Keep your emergency savings in a high-yield savings account. If you get 4% on your $100, at the end of one year you’ll have $104. 

Once your emergency account is funded with enough money to pay all of your expenses for three months with no income, consider investing in things like Treasury Inflation-Protected Securities (TIPS). These are government bonds that help protect you from inflation. 

If you have access to a retirement account through your job or if you own an IRA, stash some money there as well. 

Investing your money is the only way to outpace inflation and increase your spending power over time.

How to Beat Inflation With Budgeting

Careful budgeting helps you keep tabs on where your money is going. Budgeting can also help you identify areas where you may be able to make changes in times of inflation. Here are some tips to help you reduce spending without giving up too much:

• Carpooling or public transportation could cut down on your gas expense. 

• If you have more than one car, consider selling a vehicle for extra cash, to eliminate an auto loan payment, and to save on insurance costs.

• Examine what you spend on food and substitute cheaper alternatives. Try discount stores or less-processed food options (which are healthier anyway). 

• Try packing your lunch two or three days a week instead of going out to lunch. 

• Get together with friends for a potluck instead of routinely eating out. 

• Consider canceling your gym membership and getting a group together for a run or yoga workout. 

• Let your hair grow a little between cuts. Ditto for regular maintenance like facials or massages. If you normally go every four weeks, make it every five weeks. That’s a 20% reduction in costs. 

• Hit your friends up again and exchange babysitting or pet sitting for less-expensive nights out or weekends away. 

• Shop big-ticket expenses like insurance. See if you can drop costs by raising your deductible or finding a lower-cost provider. 

• Make friends with your town—local parks, the library, walking trails, museums, and other free or low-cost venues. 

You may pick up some good habits over the next few months. That will position you to save more and make up extra ground once inflation is under control and prices come down.

How to Invest to Beat Inflation

Investing is one of your best tools when inflation is high. The stock market often experiences short-term ups and downs, but over the long term, it tends to trend upward. This means you could increase your buying power over time and beat inflation.

Investments like bonds, stocks, and mutual funds historically perform much better than savings accounts. They do come with risk, but you can minimize the risk of loss by diversifying your portfolio. Diversifying means spreading your money out to many different kinds of investments. For instance, bonds tend to perform better when stocks are losing. So you can protect yourself from stock losses to a certain extent by investing in bonds as well as stocks. 

There are many ways to diversify your investments, and the right formula for you depends on your age, financial circumstances, and tolerance for risk. 

A great way to make sure your investments are diversified and that your investment risk level is appropriate is to talk to a professional at a big investment brokerage firm like Charles Schwab or Vanguard. 

Invest in Yourself to Beat Inflation

Investing in your professional skills or in your own business is an excellent way to beat inflation and potentially improve your finances over the long term.

Warren Buffett explained this in 2009: “If you’re the best teacher, if you’re the best surgeon, if you’re the best lawyer, you will get your share of the national economic pie regardless of the value of whatever the currency may be.” 

Buffett said that you can achieve success as a skilled employee or businessperson: “The second best protection is a wonderful business,” which means a company that has good demand for its products even if it has to raise prices. 

Buffett doesn’t recommend businesses that require a lot of capital to start or run because inflation increases the cost of borrowing. But anyone can start a side gig with little upfront funding. And if you’re very good at what you do, that little business could grow into a profitable, inflation-resistant source of income. 

Beating Inflation at Home: Don’t Panic

You can put yourself in a better financial place to beat inflation and improve your future financial security. You may need to try a handful of the strategies above. They may not all work for you, and that's okay. Figure out what you can do and stick with it. Trust that inflation will eventually slow and may even reverse on certain items, giving you a little more breathing room.