How to save so effectively that you don't feel the effects of inflation

Although the inflation rate is just one measure of economic stability, it is often a good indicator of how well Americans feel about their finances. The Federal Reserve Board likes to keep inflation around 2% to maximize stability, but economic factors — like pandemics, consumer habits and interest rates — often drive that number up or down.

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While Americans cannot predict or control this rate, it is possible to structure one's finances, especially one's savings, in such a way that one is prepared to bear the additional costs in times when the cost of living increases significantly due to inflation.

Financial experts give some tips on how to save (and invest and cut costs) effectively so that higher inflation doesn't hit you so hard.

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Bob Chitrathorn, CPFA, CFO and vice president of wealth planning at Simplified Wealth Management, said there is no shortcut to saving. Now is the time to save, whether you're just starting your first job or close to retirement. The more savings you have, the better.

That seems obvious, he added, but: “Unfortunately, people are simply not used to saving and have to find other ways to do so.”

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Choose investments that anticipate inflation

Saving does not just mean putting money into a savings account, but also making investments.

“A good way to avoid feeling the impact of inflation is to ensure that your investments grow faster than the rate of inflation,” Chitrathorn said.

This was easy to do in 2020, when inflation was 1.2%, but it was much harder in 2022, when inflation rose to 8%. In July 2024, the rate was a reasonable 2.9%. If you are spending more per year than in previous years due to inflation, make sure your investments grow by at least that amount.

“That alone is not the end, because your investment may need to grow more if you plan to use some of it in the future,” suggests Chitrathorn.

Investing in the stock market and real estate are two areas where you have a better chance of making significant profits.

Vary your investment approach

“Don’t just throw a few investments out the window and expect them to give you the same return forever,” advises Cristian Mundy, CFP and senior wealth manager at Life Line Wealth Management.

He recommends that you diversify your investments according to your investment horizon, risk tolerance and the assistance of a financial planner. You should change the way these factors take inflation and interest income into account.

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“Think of money that you put away in buckets – one bucket is what you need in months, another is what you will need in a few years, and the last is what you will have in a few years,” Mundy said. “If your money is not growing faster than [inflation]you will be behind because inflation has always been there and always will be there.”

Reduce your expenses now

Whether you're building a particularly solid emergency fund that should cover three to six months of income or cutting out unnecessary expenses like eating out or buying items you don't need, look for ways to free up money to save, Chitrathorn advises.

“If you know how to save, you can also figure out where to save,” he added.

Reduce costs in creative ways

Gerry Poirier, financial expert, CEO and founder of AngeLink, a social crowdfunding platform by and for women, suggested other ways to reduce expenses and generate extra money.

• Reduce the use of unnecessary subscriptions and restaurant visits to free up more money to save.

• Use public transportation, carpool or ride a bike to save gas.

• Rent your car through companies like Turo.

• Negotiate with service providers to see if you can lower your monthly bills.

• Buy in bulk at discount grocery stores like Costco or Sam's Club.

• Eat at home more often than out.

• Buy no-name brands and use coupons and cashback offers for everyday items.

• Instead of an expensive vacation, plan a “staycation” vacation and travel to nearby parks, beaches, mountains or the countryside.

Save in higher-yield accounts

Invest liquid assets, such as those you keep in an emergency fund, in high-interest savings accounts or money market accounts.

“Today, these can be between 3 and 5 percent, so that you not only provide liquidity, but can also keep pace with current inflation rates to some extent,” explained Mundy.

Dealing with debt

While it may not seem like paying off debt has anything to do with saving, when you consider that high-interest debt is constantly accruing interest, you may realize that holding on to debt is putting you behind.

Paying off your debt frees up money you can save. Mundy recommends starting with the debts with the highest interest rates and smallest balances.

Improve your skills

Whether you're happy with your earning power or know you can still grow, Mundy says it's always a good idea to invest in yourself by improving your skills, knowledge and well-being.

If you are unsure how to complete these steps, consider consulting a financial advisor to help guide you down the right path.

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This article originally appeared on GOBankingRates.com: How to save so effectively that you won't feel the effects of inflation