Inflation has had a noticeable impact on many households in recent years, raising an important question: How can I better prepare myself financially?

For much of modern history, inflation was not a major concern for most Americans. After peaking in the early 1980s, inflation remained largely below 3% from 1990 onward. Even when it briefly exceeded that level, it typically declined quickly and had minimal impact on household budgets.

The 2020s, however, have told a different story. Inflation reached 4.7% in 2021, surged to 8.0% in 2022, remained elevated at 4.1% in 2023, and has stayed above 3% so far in 2024. While the rate of inflation has moderated, prices have not declined. As a result, the overall cost of living has increased by approximately 20% since 2021.

This new reality naturally raises concerns about budgeting and investing. While both are important, this article focuses primarily on investment strategies, beginning with a brief overview of immediate budget adjustments that may help offset inflation’s impact.

Immediate Budget Adjustments to Offset Inflation

The most effective budget changes begin with engagement, honesty, and discipline—particularly when evaluating fixed and discretionary expenses.

Review Fixed Expenses

Fixed expenses are mandatory costs that typically cannot be eliminated, but they can sometimes be reduced. For example, reviewing insurance policies and increasing deductibles—if your emergency fund can absorb the additional risk—may lower premiums and free up monthly cash flow.

Mortgage costs are another key area to review. While many homeowners are locked into existing rates, the prospect of declining interest rates may make refinancing attractive for some, potentially reducing monthly payments.

Energy and utilities also warrant attention. Switching providers, renegotiating contracts, or locking in favorable rates may yield savings. Promotional cell phone plans, bundled services, or gas card incentives can also provide immediate relief.

Reevaluate “Semi-Fixed” Expenses

Some expenses that appear fixed—such as food and gasoline—often include discretionary elements. Food, in particular, presents opportunities for cost savings without sacrificing quality. Using coupons, purchasing generic brands, adjusting meal planning, reducing meat consumption, or limiting alcohol purchases can meaningfully improve monthly cash flow. It is important, however, not to reduce food costs at the expense of long-term health.

Payroll deductions such as HSAs, FSAs, supplemental insurance, and charitable contributions should also be reviewed periodically. Because these are withheld automatically, they are often overlooked. Temporarily adjusting or pausing certain deductions may provide short-term budget relief when appropriate.

Trim Discretionary Spending

Discretionary expenses—entertainment, dining out, streaming services, travel, non-essential clothing, and hobbies—often offer the most flexibility. While these reductions can be uncomfortable, honest evaluation of non-essential spending can significantly reduce financial pressure during inflationary periods.

Investment Strategies to Combat Inflation

Emphasize Long-Term Growth Assets

For intermediate- and long-term goals with a time horizon of five years or more, allocating approximately 80%–100% of investment portfolios (brokerage accounts, IRAs, and 401(k)s) to stocks, stock mutual funds, or stock ETFs is often appropriate.

Historically, stocks have been the most effective asset class for preserving and increasing purchasing power. Over the past 30 years, stocks have averaged annual returns of approximately 10.15%, compared to 4.41% for bonds and 2.29% for cash. In real terms, cash has lost purchasing power, bonds have largely preserved it, and stocks have meaningfully increased it.

For short-term goals—particularly those under one year—reducing risk remains prudent. However, even conservative assets should be optimized by seeking higher-yielding money market funds, Treasury securities, efficient bond funds, structured notes, or preferred stocks. Maximizing yields on cash reserves and emergency funds can meaningfully offset inflation’s impact without taking undue risk.

Incorporating Real Estate as an Inflation Hedge

Real estate has long been used to reduce portfolio volatility and hedge against inflation. While direct ownership is not appealing to everyone, there are multiple ways to gain exposure without becoming a landlord or real estate expert.

Private real estate investments—on both the ownership and credit side—can provide diversification and inflation protection without the operational burden of property management. These options are often accessible through vetted investment vehicles with professional oversight.

For those interested in direct ownership without traditional rental challenges, alternatives include raw land, farmland, or vacation properties. These investments may offer personal enjoyment alongside long-term appreciation. A vacation property, for example, may generate rental income, provide personal use, and ultimately become a retirement residence. Many real estate investments also offer tax advantages, further enhancing their appeal as an inflation hedge.

Summary

Inflation presents real challenges, but it also creates opportunities for thoughtful financial planning. Reducing debt, improving efficiency, optimizing cash yields, and ensuring proper diversification are foundational strategies during inflationary periods. By taking deliberate steps across budgeting and investing, households can reduce financial vulnerability and make inflation’s impact far more manageable. If you would like to talk about financial planning or monthly budgeting, reach out to our team of financial advisors and financial coaches today to start your financial journey.