6 Ways to Offset Inflation in 2023
Rising inflation has continued to cause anxiety for investors and consumers. On a daily basis, Americans experience the impact of high inflation at grocery stores, gas pumps, restaurants, and more.
While initially described as “transitory,” it appears that high inflation will likely persist in 2023. But rather than continuing to lose purchasing power, there are things you can do now to help preserve your nest egg and grow your wealth during high inflationary periods. Here are six ways to help offset the corrosive effects of inflation in 2023.
#1: Invest Excess Cash
Since 2020, we’ve experienced numerous periods of economic downturn and volatility. As a result, you may have felt the need to grow your cash reserves. While it’s recommended that you have a robust emergency fund on hand (typically three to six months’ income), there comes the point when you may be socking away too much cash.
Inflation reduces the value of the dollar, which means you’re essentially losing money that’s being stored under the mattress or in a savings account. If you’re in a position where you’re keeping on-hand more money than needed, it may be prudent to use that extra cash to pay down debts, grow your retirement savings, or top up investments.
#2: Pay Off or Refinance Variable Debt
The Federal Reserve has raised rates numerous times throughout 2022 in an effort to combat high inflation. As a result, interest rates everywhere have soared. For example, the average 30-year mortgage in November 2022 was 6.58%. That’s more than double last November’s average rate of 3.10%.
There are two common types of interest rates: fixed and variable.
Fixed: The interest rate is determined at the time of the loan and does not change for the life of the loan.
Variable: The interest rate changes throughout the life of the loan based on market rates or benchmarks, such as the federal funds rate.
If you have debt with a variable interest rate, including personal loans, credit cards, or mortgages, consider prioritizing paying them down or refinancing to a fixed rate. Variable rates are directly affected by rising rates at the federal level, which means they’re likely to remain high or continue rising as high inflation persists.
#3: Review Your Spending Habits
Have you noticed that your spending habits haven’t changed, but the bills grow increasingly higher? If you haven’t assessed your spending habits in a while, there may be opportunities to cut back and realign your budget to account for rising prices.
For example, menu prices at restaurants rose 9% year-over-year in October 2022. If you’ve enjoyed eating out multiple times a week, perhaps you can reduce your nights out at restaurants.
Finding small but meaningful ways to curb spending during this period of high inflation can help protect your budget and keep you on track to meet your long-term goals.
#4: Purchase I Bonds
Series I savings bonds (I bonds) are designed to help individuals protect themselves against high inflation. Issued directly from the Treasury, I bonds earn both a fixed interest rate and an inflation-adjusted interest rate. The inflation-adjusted rate is determined twice a year and remains in effect for six months.
I bonds are set for a 30-year period, although you can start cashing in after 12 months for a reduced rate. Individuals and entities can purchase up to $10,000 in I bonds per year, meaning a married couple could buy up to $20,000 in I bonds this year.
Want more information on I bonds? We cover them in depth in “Investing in I Bonds: Making Lemonade Out of Inflationary Lemons.”
#5: Reassess Your Diversification Strategy
Continued high inflation is a common cause for re-evaluating portfolios.
For example, you could be too concentrated in certain areas that thrive under low-inflation environments but suffer during high-inflationary periods. Maybe you’ve limited your portfolio to U.S.-only stocks, but there’s an opportunity for more international exposure. Or, you aren’t investing enough in inflation-resistant commodities like gold or real estate.
Another common consideration is value stocks versus growth stocks. If growth stocks are more reactive to rising rates, should you turn your attention to value stocks?
These are all questions our Denver area retirement planning firm helps clients answer. Changes to your portfolio should be considered carefully and in conjunction with your tolerance for risk and long-term objectives.
#6: Consider Real Estate Opportunities
There will always be a need for housing, despite rising rates and high inflation. Because of this, many consider real estate purchases or upgrades to be a natural hedge against high inflation.
With rising mortgage rates and high home prices, the rental market continues to thrive. That means landlords can maintain or raise rents to meet the demand and rising inflation rates.
If you own a home and don’t plan on purchasing more property, making improvements to your property can also help grow your home’s equity.
Are You Concerned About Inflation?
The headlines regarding high inflation are starting to feel like broken records—but that doesn’t mean they should be ignored. Being proactive in protecting your buying power is important, and there are steps you can take right now to curb the impacts caused by inflation.
Our team at Stordahl Capital Management is here to help you review your options and build a plan of action for 2023 and beyond. Feel free to schedule a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
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