Inflation may have you counting your pennies and paying closer attention in the checkout line. If you're like many Americans, you may have even run up some credit card debt1 trying to keep up with skyrocketing prices. The most recent inﬂation report put the rate of price increases at 8.5%. For families that are able to absorb higher prices, inflation may be a minor annoyance but for many Americans, months of painfully high prices is an emergency.
Consider how $50,000 worth of annual expenses grew from 1991 to 2021, and the diﬀerence a small change in the inﬂation rate would have made over that period:
No one is sure how long inﬂation will stay elevated above historical averages but it could stick around longer than anyone would like. Learning how to fight inflation, now and in the future, can help make sure your spending power can keep up.
If you haven't checked in on your portfolio recently, now is a good time. As always, Fidelity suggests having a diversiﬁed mix of stocks, bonds, and other investments consistent with your personal goals. If you have a diversiﬁed portfolio ﬁlled with stocks, bonds, and short-term investments, you may already be well-protected from inﬂation. But within a diversiﬁed portfolio, there are a variety of ways to add inﬂation protection.
Investments with the potential to keep up with inﬂation—or exceed it—over time typically come with some risks. Historically, stocks have oﬀered the highest average annual return of the traditional asset classes—along with more volatility—followed by bonds, and short-term investments.
For people with a long time frame for investing, the growth potential of stocks can make the risks worth it. You may have a better chance of reaching your goals, like retirement or funding a child's education. Investing conservatively comes with its own set of risks, namely, the possibility that your money won't buy as much in the future as it does now.
With the price of food and energy rising fast, inﬂation is already hitting most of us right in the budget. A recent analysis from Moody's Analytics5 found that the average household is spending almost $460 more per month because of inﬂation. As you look for ways to tighten your belt, keep an eye on your budget. Fidelity suggests spending no more than 50% of your take-home pay on essential expenses like food and housing, to give you room to save for retirement, plan for short-term goals, and spend on nonessentials.
The cost of essential expenses is rising much faster than discretionary items, and this means your emergency savings may need to grow too. We recommend setting aside enough money to cover 3–6 months of essential expenses in case of emergency. When you factor in the cost of inﬂation, is your emergency fund still suﬃcient?
And think about where you have the money stashed. Can you earn a higher return with a relatively low risk investment that you can depend on if you do need to access it?
Now is also a good time to be sure you still have suﬃcient life insurance. One simple guideline is to aim for 5 to 10 times your annual salary and bonus, but prices are rising faster than income these days, so that approach could leave you with insuﬃcient coverage.
To do a more robust calculation, start with your family's day-to-day needs—the entire amount of money it takes to run your household each month. Next, plan for larger expenses such as college, paying oﬀ student loans, a mortgage, other debts, running a business, or potential medical issues.
Similarly, this would be a terrible time to ﬁnd that you're underinsured at home in case of ﬁre or theft. The price of construction materials alone has skyrocketed, not to mention all the things in your house you might have to replace. So the next time your homeowners or renters insurance is up for review, take a close look to make sure you have enough coverage.
When the cost of everything goes up but your income stays the same, there are really only a few options. You can buy less, buy cheaper substitutes, or try to find more money.
In the long run, healthy personal finance fundamentals can be one of the best ways to help set yourself up for success in any economy. Spending less than you earn and avoiding high-interest debt can set a strong foundation for your future. Build on it by keeping money on hand for emergencies, strategies to protect what you have, and investing for growth potential. Navigating uncertainty may be easier when you focus on the things you can control.