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Inflation’s effect on savings: How it works & ways to offset it

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Feeling nervous about your savings? You’re not alone. The last few years have been tumultuous for everyone. Add financial worries to the mix and it's easy to feel a little overwhelmed as you try to make the best money decisions for your future. In fact, the 2022 Thrivent Consumer Financial Outlook survey* found that after nearly two years of high inflation, many Americans are experiencing financial stress:

  • 78% wish they had more breathing room in their finances.
  • 63% say inflation is putting them off track financially.
  • 60% note that inflation is getting in the way of saving more.

And while you can't stop inflation, you can build a financial strategy that anticipates it and helps offset the effects over time. Here’s how.

What is inflation?

Prices typically rise over time. Inflation measures the rate at which they rise and, in turn, how much those increases impact spending power. The Consumer Price Index (CPI) is one of the primary ways to measure inflation. It tracks the costs of goods and services as well as the average change over time for the prices urban consumers pay.

When prices rise, people must spend more for the same goods and services than before. You may remember when $10 could get you a movie ticket and popcorn. Now, that same $10 likely only covers the cost of your ticket. You could get more for your money at that time than you could now. That's inflation in action.

The Federal Reserve generally expects inflation to rise about 2% each year. That slight increase gets priced into the economy. However, due to a number of global factors, including the lingering pandemic, conflict in Europe and supply chain issues, inflation has risen sharply over the past year. The 8.5% inflation rate (not including seasonal adjustment) seen over the past 12 months is the country's highest since the early 1980s.

How does inflation affect savings?

Just like in the movie ticket example above, inflation affects your savings through your spending power. The money you set aside for goals like retirement and major purchases may not be enough to cover those things anymore since your money today won’t go as far down the road. And when 59% of people say they feel like they live paycheck to paycheck in today’s economy, that strain on your day-to-day finances can make it hard to find extra funds to set aside and save—slowing your overall savings progress.

How can you offset inflation’s effects on your savings?

Though inflation is likely to put anyone’s savings in a bit of a crunch, there are certain steps you can take to help combat its impact as much as possible.

Set a budget & stick to it

Let's face it; sometimes, not spending feels hard or downright impossible. Having a clear view of where you're spending your money can help you develop a savings plan that helps you hit both your short-term and long-term goals. The first step is to look at your budget—without judgment. Track it over the course of a month to get a good idea about where your money is going and what you have left over. Also, keep an eye out for lifestyle inflation; you may be spending more simply because you make more, allowing your budget to creep up. You’ll especially want to make sure you’re not dipping into your savings or nest egg to keep up with that spending.

Once you’ve tracked where your money is going, look and see what you can cut and your non-negotiables. It’s easier to get rid of expenses that aren’t adding much value to your life. For instance, charitable giving may be a financial value you're not willing to cut, but going out to dinner one less night a week, shopping smarter and cutting back on some subscriptions may be easy decisions. Saving even $50 a week can quickly add up, giving you $200 a month to help cover rising costs and add to your savings and retirement funds.

Establish an emergency fund

Think about the term “rainy day fund.” For many, 2020 was that rainy day as people lost their jobs or worked reduced hours—forcing them to rely on their savings to help make ends meet.

As you think about your own emergency savings, a good rule of thumb is to have between three to six months' worth of expected expenses in an emergency fund to help you avoid dipping into retirement savings or other investments when you need cash. Consider putting the money in a high-yield savings account with higher interest rates to reduce the impact of inflation.

Revisit your retirement plans

Your general savings may be top of mind right now—but don’t forget your retirement savings, too. If you still have some time before retirement, you may reevaluate your plans to help ensure you account for inflationary impact over the long-term.

Knowing how much you need to retire can help you make smarter choices when it comes to planning and saving. Use a retirement income calculator to see where you stand today, and talk with a financial advisor about charting your course.

Does investing help beat inflation?

Careful investing can be another way to potentially help protect your savings from inflation’s effects. You’ll want to carefully weigh the types of investments in your portfolio to accomplish this. For instance, if you invest primarily in stocks and mutual funds, you may see mixed results as it's hard to predict which companies will perform well during inflationary periods, and inflation can still cut into your returns. But other investment types like commodities and Treasury Inflation-Protected Securities (TIPS) may weather inflation better.

Looking to diversify your portfolio?
Get the right mix of investments to help protect against inflation.

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Don’t go it alone

Bottom line: The longer your time horizon for saving, the less inflation may impact your savings. Think about the long-term: While things may be bumpy now, there will be other times when the economy and market outperform expectations—and, in many cases, it evens out over time.

Although it's hard to know exactly how long periods of high inflation will last, building knowledge and having a plan in place can help you feel more comfortable about its impact on your family's finances and lifestyle. A financial advisor can help you see the bigger picture, set a plan in line with your financial priorities and instill confidence that you're moving in the right direction.

*Methodology: This general population research was conducted in partnership with data intelligence company Morning Consult and polled 2,221 adults across the country between May 9 and 17, 2022. The interviews were conducted online, and the data were weighted to approximate a target sample of nationally representative adults based on age, gender, ethnicity, income, geography. Results from the full survey have a margin of error of +/- 2 percentage points.