The 5 Best Money Moves to Make When Inflation Is High

As you may remember from a high school economics class, inflation is simply the decline of purchasing power. If currency is worth less now than it was yesterday, everything becomes more expensive and most of us begin to experience a drop in our overall quality of life. In late 2021, consumer prices rose 6.2% in the United States, compared to the previous twelve months, marking the highest inflation rate in over 30 years. Let’s take a closer look at how that figure breaks down.

According the the Bureau of Labor Statistics, over the last 12 months:

The cost of food (at home): 5.4% Increase
The cost of food (away from home): 5.3% Increase
Energy prices: 30% Increase
The price of Gasoline alone: 49.6% Increase
Electricity costs alone: 6.5% Increase
Used cars and trucks: 26.4% Increase
New cars and trucks: 9.8% Increase
Airline fares: -4.6% Decrease

Energy prices tend to fluctuate a lot in any year but a 30% increase is certainly significant. The last time there was a percentage increase so high for energy prices was in 2005. Similarly, consumers are feeling the squeeze when they are going to buy new cars or trucks, or when they’re at the grocery store or restaurants. But fret not, inflation occurs cyclically and in stable economies doesn’t usually spiral out of control. There are also steps you can take to protect your money, or even outpace the negative effects of higher-than-normal inflation.

1. Dismantle your emergency fund (keep less cash)

Though I have been a vocal proponent of the emergency fund, if you’re gainfully employed and have access to enough credit, your 6-12 month cash savings becomes somewhat unnecessary. Obviously cash doesn’t hold it’s value forever due to normal inflation. So during periods of high inflation it makes even less financial sense to hold a lot of cash. A better plan is to keep enough cash to cover your rent or mortgage for a few months and to use credit and the sale of assets to support yourself if you happen to lose your job. I have been keeping a too-high emergency fund for years, partially because I like the freedom and security of knowing I have cash on hand. However, because I have always been employed, I budget, save and invest, I’ve literally never had to rely on my emergency fund and it doesn’t make me nearly as much money as it could sitting in a money market brokerage account.

Good reasons to get rid of your emergency fund:

  • You are gainfully employed
  • You save money every month
  • Historically you have not had to rely on your emergency fund
  • You have a working partner
  • You have other streams of revenue
  • You have assets
  • You have access to credit

Good reasons to hold more cash:

  • You want to quickly deploy cash to stocks when the stock market crashes and currently hold it in a money market account. Related: How to Invest When the Stock Market Crashes
  • You have unreliable employment
  • You have a tight budget as it is
  • You support children/parents without a working spouse

    So how much cash should you hold then? I don’t know, you have to determine that number based on the various factors of your financial situation. However, keeping 6 months of cash in a savings account that doesn’t keep pace with normal inflation, let alone high inflation, is outdated advice and harmful to your financial growth over time.

2. Buy less stuff

When currency begins to holds less value, the other side of the coin is that everything naturally costs more. In fact, some goods, like cars and trucks, cost a lot more right now due to a variety of factors largely unrelated to inflation, so it’s especially important to avoid car buying, or otherwise identify goods that are overvalued. In general though, it’s best to tone down overall shopping during periods of high inflation and opt for lower cost experiences like hiking, biking, cooking at home and spending time with friends and family.

3. Invest in real estate

Though renting isn’t the horrible financial decision it is often painted as, when your the value of cash is dropping and landlords have the ability to raise rents at any time, it’s generally best to pivot towards purchasing real estate. That’s because with real estate you can get a fixed-rate mortgage at a low rate, thus guaranteeing a stable payment regardless of what happens with inflation. If inflation does continue, then the mortgage company is literally being paid back with less valuable currency than they lent you. You also get a tangible asset that you can leverage, sell, reside in or rent out. Though in many places the cost of home ownership has also risen significantly, my vote for anyone experiencing raising rents during high inflation, is to buy real estate as soon as possible. This is especially true in places where the average cost of a renting is higher than the average cost of a mortgage.

Related: 10 Reasons Why Owning a House Is Better Than Renting, Even When It’s More Expensive

4. Invest in broadly diversified stock funds (I.E. stay the course)

What do you do with all the cash that you saved for your emergency fund but don’t need anymore? Invest for the long term of course. The smart move is to invest immediately, in tranches, in order to dollar-cost-average the best price. You do this with the understanding that the market will fluctuate in the short term but will most likely outpace inflation significantly given enough time.

Is that what I’m doing? Sort of. It may not be the absolute smartest move but I feel that, like cars and houses, the price of stocks are severely overvalued. Thus, I only want to invest in stock funds that are on the decline, like emerging markets, or only a little when there is a significant drop in price. My hope is that if I follow this strategy I can witness the entire market tanking and can pick up all my favorite stuff (mostly VTSAX) at super low prices. Of course this could lead an me to miss out on a bull market that could be raging for years, so as a hedge to this strategy, I make sure that I at least invest all investible cash, per my ideal asset allocation by the end of the tax year.

Related: The Best Free Asset Allocation Spreadsheet

5. Invest in Treasury Inflation-Protected Securities (TIPS)

The goal of TIPS is specifically to protect against inflation so it seems like a no-brainer to invest in them when inflation is high. That is, provided that you are looking for a low-risk investment that is likely to protect the value of your cash but unlikely to match the returns from stocks, and sometimes even bond yields. The par value of TIPs is adjusted by the U.S. Treasury based on the Consumer Price Index and the principal investment increases with rising inflation and decreases during periods of deflation. TIPS are also fully backed by the U.S. government which provides further security that you will always be able to cash them out at, or even before their maturity.

However, the disadvantages of Treasury Inflation-Protected Securities is that their return is hard to predict and you might pay income tax on increases to par value before maturity, like you would for bond interest or stock dividends. I would personally rather take on a bit more risk by investing broadly in total stock market ETFs, but right now I can afford to take on more risk based on my age, employment and cash holdings.

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