3 inflation-savvy moves to make now

Inflation is proving to be a stubborn, unwanted houseguest.

No one is particularly keen on paying more for groceries, fuel, and other living expenses. But so far, attempts by the Federal Reserve since March to drive out inflation with higher interest rates have not worked. Since we might be stuck with that awkward roommate for a while, let’s consider how best to deal with it.

The following steps might help.


Many people live paycheck to paycheck with little in the way of savings. Other people have the opposite problem: they leave too much cash in bank accounts that don’t make a living.

According to the Federal Deposit Insurance Corp. the nationwide average interest rate for savings accounts in October is just 0.17%. Inflation, as measured by the consumer price index, is now over 8%.

“Cash in the bank just isn’t going to keep up with inflation, so it’s going to lose value,” says certified financial planner Ben Henry-Moreland, who blogs at Kitces.com, a website for financial advisors.

You can earn inflation-protected returns by using savings to pay off high-interest, variable-rate debt, such as debt. B. credit card balance to settle. For example, if your credit card charges 18% interest, you’re effectively getting a guaranteed 18% return by paying off that balance.

Setting goals and deadlines for your money can also help you get more bang for your buck, says Henry-Moreland. For example, financial planners typically recommend maintaining an emergency fund equal to three to six months’ expenses. This money should remain in a safe and accessible place, e.g. B. In an FDIC-insured bank account, as you may need it at any time. But you don’t have to accept the negligible returns of a brick-and-mortar bank; Several online banks offer interest rates of 2% or more on savings accounts.

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Maybe you’re saving for the vacation you want to take in a year, or the down payment on a house five years from now. You could lock your holiday money into a one-year certificate (some online banks offer 3% on it), while the deposit could be invested in a Series I savings bond, which yields 9.62%. That’s a great interest rate, of course, but Series I bonds have several caveats: you can’t withdraw money for the first 12 months, and you lose three months’ interest if you withdraw money for the first five years. You can buy $10,000 of I bonds annually and $5,000 of paper bonds annually with your tax return electronically at TreasuryDirect.gov.

Consider using excess cash to supplement your retirement accounts or investing that money in a taxable brokerage account, says Henry-Moreland. A diversified stock portfolio is likely to outperform inflation over the long term, although the potential for near-term losses means you shouldn’t invest money you’ll need within five years or so.

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Construction costs have skyrocketed and your home insurance coverage may not be able to keep up.

About two-thirds of homeowners who lose their homes to wildfires or other disasters find their insurance doesn’t cover the full cost of rebuilding, says Amy Bach, executive director of United Policeholders, an insurance-focused consumer protection group.

You can ask your insurance company or agent to review your coverage and recommend reasonable limits, Bach says. However, those estimates may rely on problematic industry software that could underestimate costs, she says. She recommends that you also speak to a contractor or surveyor who can give you an estimate of the remodeling cost per square foot in your area.


If your income has increased this year, you may be at risk of bracket creep. That’s when you’ll be pushed into a higher tax bracket — and face higher tax bills — even if your salary doesn’t keep up with inflation.

Dozens of federal tax rules can be adjusted for inflation each year, including tax brackets, standard withholding amounts, limits on pension contributions and certain credits, says Melanie Lauridsen, director of tax practice and ethics at the American Institute of CPAs. However, since 2018, Congress has required the IRS to use a measure of inflation called the chained consumer price index, which typically lags the consumer price index. In addition, inflation adjustments for the following year are determined using the inflation rate in August, notes Henry-Moreland. If inflation spikes later in the year, as it did in 2021, bracket creep is more likely.

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Let’s say you got an 8% raise this year to deal with inflation. But the standard deduction and tax brackets were only increased by about 3% for 2022. That means you could find yourself in a higher tax bracket if you file your tax return in April.

Calculating your likely taxes for 2022 now can alert you to a looming tax bill and give you some time to deal with it — like putting more money in pre-tax retirement accounts or filling out a new W-4 to get your adjust withholding tax.


This column was provided to The Associated Press by personal finance site NerdWallet. Content is provided for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of Your Credit Score. Email: [email protected] Twitter: @lizweston.


NerdWallet: How to protect your purchasing power from inflation


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