While inflation has cooled considerably over the past year, American families continue to feel the pinch of higher prices.
Take groceries, for example. While food prices are growing a lot more slowly than they were, they remain about 20% higher than they were just 2 years ago.
And that's just one piece of your budget. Consider how $50,000 worth of annual expenses grew from 1997 to 2023, and the difference a small change in the inflation rate would have made over that period:
Learning how to fight inflation, no matter how hot or cool, can help make sure your spending power can keep up.
1. Investing in a diversified mix
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, but keep in mind that a diversified portfolio won't ensure gains or guarantee against losses. If you have a diversified portfolio filled with stocks, bonds, and short-term investments, you may already be well-positioned to protect yourself 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.
2. Stay financially healthy with a budget
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.
3. Boost your emergency fund
When inflation was at its peak in 2022, the cost of essential expenses—like groceries—was rising much faster than discretionary items. If you find yourself spending more money on day-to-day expenses than you used to, your emergency savings may need to grow too.
Fidelity recommends setting aside enough money to cover 3–6 months of essential expenses in case of emergency. This includes housing, food, health care, transportation, and childcare costs. 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?
4. Review your insurance
Now is also a good time to be sure you still have sufficient insurance, especially life insurance and homeowners coverage.
When you're thinking about life insurance, one simple guideline is to aim for 5 to 10 times your annual salary and bonus, but that approach could leave you with insufficient coverage if your income hasn't kept up with inflation.
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.
Homeowners have faced a different type of inflation in recent years—the cost of insurance has risen right along with home prices. But it's important to protect yourself in case of fire, theft, or natural disaster.
You can potentially lower your annual cost by shopping around for a better deal or raising your deductible. And don't forget to account for any home improvements that have made your home more secure; these may earn you a small discount.
The truth about fighting higher prices
When the cost of everything goes up but your income stays the same, you really only have 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.