3 Ways to Combat Inflation

Investing is so important because inflation is so dangerous. What’s inflation? Where money depreciates in value as time goes on. As the government utilizes more techniques to keep our economy growing, those tactics tend to cost us in the long run by devaluing our currency. Things get more expensive as a result. With inflation, a tide is rising while you’re standing still. Having savings in the bank allows you to float for a time, but as the tide rises, you begin to drown.

Inflation has averaged 3.12% per year over the last hundred years.[1] At first glance, that sounds pretty low—until you feel the weight of it over time. If you do the math, at a rate of 3% inflation, everything you bought today would nearly double in price in 20 years. Inflation is not a constant. Before Covid, we were blessed with several years of low inflation. But now I’m sure we’ve all personally experienced accelerated inflation in this post-Covid era. We’ve seen historic jumps in inflation—as much as 9.1% from 2021 to 2022 alone.[2] That’s a big jump!

There’s a biblical example of extreme inflation in the book of 2 Kings. In this passage, the Syrians laid siege against Israel’s capital city, encamping around it to cut off supply chains and create a lockdown situation. 2 Kings 2.25 says, “They kept up the attack until there was nothing to eat in the city. In fact, a donkey’s head cost 80 pieces of silver, and a small bowl of pigeon droppings cost 5 pieces of silver” (CEV). Inflation was so serious that they were eating unclean things that cost an exorbitant amount just to stay alive. In a miraculous string of events, God causes the Syrians to flee, the Israelites plunder their enemies’ encampment, and prices go back to normal. No more inflation. Unfortunately for us, those high prices usually remain.

It’s easy to see that your money will depreciate with inflation if it’s not invested properly. While your investment may post gains over time, it may actually be losing value if it does not at least keep pace with the rate of inflation. The goal is to find investments that get your money working harder for you. So how can you help your money grow faster than prices are increasing? Let’s look at a few ways.

Avoid Certificates of Deposit (Ahem, Disappointment)
The first thing you can do is avoid the CD treadmill.

CD stands for Certificate of Deposit. With a CD, you designate a certain amount into an account for a specific term, and in return, the financial institution provides you a set, guaranteed dividend rate on your funds. Guaranteed returns! It sounds great in theory, but in practice, a 1 to 2% return for your CD just isn’t going to keep up with inflation—especially at the rate that supplies and costs keep increasing.

Now, a CD is a great place for your emergency fund or three-to-six months’ worth of expenses. But I’ve seen it all too often where many retirees are jumping from one six-month CD to another six-month CD, constantly in pursuit of a higher interest rate.

[1] https://www.in2013dollars.com/inflation-rate-in-1838 -1
[2] https://www.pbs.org/newshour/economy/u-s-inflation-at-9-1-percent-a-record-high

In my office, I’ve referred to CDs as “Certificates of Disappointment” because most of the time, you feel disappointed – like you’re running in place. That’s because you are. Your money stays busy but it hardly ever makes progress, like it’s walking on a treadmill going nowhere. Instead, determine what you really need to stash away in the bank for your emergency fund, and utilize longer term maturities more efficiently.

Replace Taxable Accounts with Long-Term Investments
The next thing you can do to combat inflation is avoid taxable accounts.

This might hit hard for some of you, but hear me out. Many people don’t expect that when they deposit extra income in interest-bearing accounts like CDs, Money Markets, and other savings products, that they’ll have to pay tax on the interest they earn. You may feel giddy that you’re getting the best CD rate in the country, but then you get that 1099-DIV in the mail from your bank at the end of the year, and it’s time for Uncle Sam to get his share. So a percentage of your profits are gone.

With taxable accounts, you first pay taxes on the income that you’re investing in them, and then you pay income taxes again on the interest that the CD or Money Market earns each year. It feels a lot like paying taxes twice. That’s because it is.

Instead, consider investments that let you choose when you pay the taxes again. For example, with stocks, you pay taxes on the gains when you sell. With real estate, you pay taxes when you sell the property. And with annuities, it’s when you take a disbursement.

Again, the bank is the ideal place for your emergency fund. But when it comes to any amount beyond that, don’t let it sit in savings and depreciate, causing you to lose money in the long run. Instead, look for alternative investment options that can do more work for you.

Don’t Invest in the Market as It’s Going Up
Finally, to combat inflation, don’t flip to extremes.

Many investors sit on the sidelines only to get disgruntled when the market is going up. Unfortunately, many take this as a sign to jump back into the market at its peak. Then they come to realize that the music is fading and they’re about to be the last ones at the party holding the bill.

Proverbs 13.11 says, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” Faithfully saving and investing little by little, day by day will earn more in the long run than get-rich-quick schemes or easy money. Slow and steady wins the race.

Instead of jumping into the market at its peak, think of this as a good time to squeeze out more returns in other avenues. Here’s an easy example to illustrate this point. In my financial advisor office, if I have a client who owns a 2% CD, at maturity we could move it to a 3% paying bond or multi-year guaranteed annuity. With all things being equal, that’s a real improvement. Let’s do the math. If that balance is $300K in extra cash equivalents, a 1% improvement equates to $3,000 more in annual interest. Not too bad.

Today, we talked about three ways to combat inflation:

  • First, avoid CDs. They’re certificates of disappointment for a reason.
  • Second, replace taxable savings accounts with better long-term investment strategies.
  • Third, don’t flip to extremes and invest in the market as it’s going up. Instead, capitalize on the peak market to earn more returns.

Inflation is the silent tax that slowly whittles a hole in our pockets over time. You deserve money that isn’t just sitting there, but ready to go to work for you. Choose investments that keep pace with and surpass inflation.

Ultimately, though, our hope is not in returns on our investment, but in God. Paul gave some timeless advice to his protégé Timothy hundreds of years ago that still applies today: “As for the rich in this present age, charge them not to be haughty, nor to set their hopes on the uncertainty of riches, but on God, who richly provides us with everything to enjoy” (1 Timothy 6.17). Be wise and discerning with your money using some of the strategies we talked about today, give generously, give often—but make God your ultimate hope.

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