Yes, you can make inflation work in your favor. Here’s how

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Last week, a fellow CPA told me about a client who was so upset at rising prices, she blurted out, “Why should I save money if inflation is just gonna take it all?”

He didn’t know what to tell her. I did…

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“I’d tell her the same thing I told my son when he was a child. He’d argue, ‘Why should I take a shower when I’ll just get dirty again later?’ You do it because the alternative is really disgusting.”

Yes, inflation is eating away at your income and future savings. Giving up on financial responsibility is disgusting and irresponsible.

Yet that’s happening. Despite inflation,  Americans are still spending. They’re just complaining more often while doing it. In the end their savings will be depleted and their credit card balances will increase.

So while one poll shows 88 percent of Americans are “very worried about inflation,” the Federal Reserve Bank of New York’s data “shows a continued rise in monthly household spending growth, with spending growth moving well above pre-pandemic levels.”

To be clear, I’m not attacking my fellow Americans. 

This is about psychology, not nationality. Even in Canada, it was reported last week, “Red-hot inflation has Canadians opening their wallets wider at the grocery store and gas pump, but that’s not stopping them from also spending on travel, new cars and home improvements as pent-up demand outweighs cost pressures.”

How NOT to fight inflation

Also last week, two reporters asked me for tips about saving on gas prices. One said her readers were clamoring for ways to cut their fuel bills. I gave my standard advice: Embrace technology and download apps like GasBuddy and Gas Guru. They help you locate the best prices in your area.

However, I added this…

During this historically high era of inflation, I’ve seen many smart people making rash and uninformed decisions. For example, one Debt.com reader submitted this to Ask the Expert: “I want to make up for inflation by investing in crypto. I just got a zero-percent credit card, and it gives me six months of no interest. If I charge for the crypto, that gives me six months to make a profit. Which crypto currency is the best for making a profit after six months?”

I replied personally to this reader: You never incur debt to invest, unless the investment is sound and stable. Crypto currency is anything but a sound and stable investment. You should only invest money you can afford to lose, and crypto is ONE OF the riskiest investments.

I didn’t even mention that most credit card companies don’t let you charge for cryptocurrencies. The bigger point was the crazy lengths people are going to make up for what inflation is taking from them.

I asked this reader – let’s call him Crypto Ken – if he even knew how inflation was calculated. He didn’t. Most people don’t. They also don’t know there are two inflation rates, calculated by two different federal agencies.

Forbes offers my favorite explanation: One inflation rate is measured by the Bureau of Labor Statistics “by taking the average weighted cost of a basket of goods in a given month and dividing it by the same basket from the previous month.”

The Bureau of Economic Analysis “tracks the prices businesses report selling goods and services for.”

I mention these details for one reason: The only inflation rate that matters is the one that affects your bottom line.

I asked Crypto Ken exactly how much inflation has cost him. He didn’t know. He’d never added it up. Yet he was prepared to take out a loan to invest in cryptocurrency because he feared inflation.

If you’ve stuck with me this far, here’s the payoff…

How to fight inflation – forever

It’s hard to fight a war without a map. You can’t fight inflation without a budget. Yet I see smart people panicking over the rising price of gas – when they have no idea how much they spend on bigger items. For instance, you probably know the cost of a gallon of gas in your neighborhood. Do you know what the interest rate is on your credit card? If you carry a balance, do you know how much that’s costing you annually?

I’m old enough to have been a CPA and financial counselor through several inflationary periods. I’m experienced enough to know the best survival tactic is to use this time of newfound financial focus to really study your expenses. Every year, Debt.com conducts a poll that asks how many Americans keep a monthly budget. Usually, it’s less than 7 in 10. During the pandemic, that rose to 8 in 10 likely due to the fact that people were sitting home with excess time on their hands and all of us were scared.

Yet that still leaves millions of households without a budget. How can you save money if you don’t know how much money you’ve spent?

The pandemic convinced many people to budget out of fear. I’m hoping inflation will convince the rest to budget out of anger. If that happens, this costly inflationary era will actually save this country money in the long run.

This article originally appeared on Debt.com and was syndicated by MediaFeed.org. 

More from MediaFeed:

4 places to store short-term savings

4 places to store short term savings

If you have a large but not immediate savings goal (such as the downpayment on a home, a kitchen reno or an emergency fund), you may want to consider some good short-term savings options. While there is no formal definition of short-term savings, it’s generally considered to be money you want to use in less than five years.

There are a number of options for short-term savings, but one of the best places to start saving up for a short-term financial goal is a savings account (of which there are several to choose from, all with different pros and cons). Savings accounts typically have the key features people are looking for when saving for the short-term: safety (meaning you shouldn’t lose any money), liquidity (meaning you can access your money when you need it) and growth (meaning interest-bearing).

But some savings accounts offer more liquidity and higher interest rates than others. With a little knowledge, however, you can start socking your money away in the right place and start moving closer to those short-term savings goals.

Related: Tips for creating a financial plan

Suwanmanee99 / istockphoto

One significant downside to any cash savings account is that they tend to have relatively low-interest rates. This could make you wonder: Should I invest this money in stocks or a mutual fund in order to meet my short-term goals more quickly?

Generally speaking, for short-term money, your goal is not necessarily to maximize returns. It is to control the risk (to keep it safe) so that the money is available when it’s needed. While everyone’s risk tolerance is different, the downside to investing in the market is that you might lose money in the short term.

Investment returns start to “smooth out,” or return their average yield, over longer periods. Shorter periods tend to be volatile and unpredictable, especially in the stock market.

To invest in the short-term would require complete flexibility—if the market takes a steep nosedive, it would likely be best to wait it out and avoid realizing losses. Suddenly, you’re on the market’s timeline—not your own. Because of this, these investments may be inappropriate for an emergency fund, which needs to be accessible at all times. The same goes for those financial goals with a hard deadline (such as wanting to use this money as a down payment in two years).

That said, there’s a trade-off. Many of the options for short-term savings may not keep up with increasing prices, or inflation. For money that isn’t needed for many years to come, it can be a smart idea to consider investing to grow beyond inflation.

If you’d prefer to avoid risk with your short-term savings, here are options to consider.

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Online-only savings accounts, also sometimes referred to as high-yield savings accounts, are an increasingly popular option for short-term savings. As their name implies, these banks or financial institutions only operate online. That means no brick-and-mortar locations and no chatting up a banker face to face. It could also mean less business costs and overhead and therefore, higher rates of interest paid.

A potentially higher rate of interest isn’t the only reason to use online-only savings accounts. The websites and mobile apps for online accounts essentially serve as storefronts, so online financial institutions often devote lots of resources to make sure they’re optimized and easy to navigate.

Additionally, many online-only institutions don’t have monthly account fees, which can be a real burden for those at the start of their savings journey. (For example, some traditional banks might charge a fee when balance drops below the minimum.)

Banking online doesn’t mean you have to forgo the conveniences of your neighborhood bank.  You can typically still do all of the important banking duties, such as depositing checks (via snapping a picture of the check on your phone), moving money back and forth between accounts, and speaking with a customer service rep.

In the past, most online savings accounts were required by the Federal Reserve to limit withdrawals to six times per month. These rules are continually evolving, however, so before you sign up, you’ll want to understand the rules for accessing your money. 

Also, while online banking is now considered mainstream, it’s always smart to do a little background research before you open an online account. You may want to check, for instance, how long the online institution has been around, and also make sure they have Federal Deposit Insurance Corp (FDIC) coverage, a government-guaranteed program that protects your money.

Nattakorn Maneerat / istockphoto

A certificate of deposit (CD) is a savings account that holds a specific and fixed amount of money, and for a designated period of time, such as six months or three years. In exchange for the deposit, the bank pays a fixed rate of interest. Generally, CDs with longer maturities offer higher interest rates. For example, a bank is typically going to be willing to pay more for a deposit that’s guaranteed for five years as compared to three months. As a saver, you often get more rewards for the risk.

You may also want to keep in mind that the interest rate on a CD is locked in at the point of purchase, as opposed to the interest rate in a savings account (both traditional and online-only), which may fluctuate. If you’re interested in locking in a certain rate, you may want to consider a CD. (Although be aware that you would be locking yourself into a lower rate, if rates rise.)

While savings accounts are designed to provide regular access to your money, CDs are not. Because CDs have a fixed timeframe, there may be a penalty to access the money before the period is over. And in exchange for the lock-up period, you may find that financial institutions pay slightly more interest than online-only savings accounts.

CDs can be a good option for people who don’t need to touch their short-term savings for a certain period of time. And they are typically FDIC-insured.

Andrii Dodonov/istock

money market account (MMA) is like a mix between a savings and a checking account. These accounts, offered by banks and credit unions, can allow you to write checks (though you may be limited on how often) and may also have a debit card. (Savings accounts, whether online or at a traditional bank, typically do not allow for check-writing.)

Returns on these accounts typically beat those on traditional savings accounts. Depending on what’s happening in the economy overall, an MMA may be in line with that of an online-only bank account. However, MMAs sometimes require higher minimum balances than other types of savings accounts. So this might be a better option for those with more money to save.

MMAs are considered a safe choice since, like other types of savings account they are typically covered by FDIC if held by a bank, and National Credit Union Administration (NCUA), if held by a credit union. (Although, it’s always a good idea to double-check insurance coverage to be sure.)

Keep in mind that MMAs differ from money market mutual funds, which are not FDIC- or NCUA-insured.

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cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union. These accounts are designed to merge the services and features of checking, savings and investment accounts all into one offering.

While CMAs are typically offered by financial service providers that are not themselves technically classified as banks, they are still usually covered by FDIC deposit insurance like regular bank deposits, often through a partner bank. Generally, when you put money in a cash management account, it earns money (often through low-risk investing that is done automatically), while you can also access it for your daily spending. This allows CMAs to function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.

Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum, Before opening a cash management account, it’s a good idea to ask about monthly fees and minimum balance requirements. Also, since cash management account providers automatically “sweep” your unused cash into investments that pay dividends or interest (which maximizes the account’s profitability), you may want to make sure those sweep accounts are low risk or FDIC-insured.

For people who are interested in streamlining their accounts, as well as saving for a short-term goal, a CMA can be a good option.

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<div class=”rich-text”><p>Short-terms savings is money that you likely will need in the not too-distant future, such as two to five years. There are a number of options for short-terms savings, but some of the safest bets include online savings accounts, CDs, money market accounts, and cash management accounts. These accounts tend to be low-risk, typically allow you to have access to your money when you need it and can offer a higher return than a traditional savings or checking account.</p><p><br/></p><p>No matter which short-term savings option you choose, the most important thing is that you find something that suits you and that you use it!</p><p><br/></p><p><b>Learn more:</b></p><p><b></b></p><p></p><ul><li><b><a href=”https://www.sofi.com/learn/content/types-of-savings-accounts/” target=”_blank”>5 types of savings you should consider having</a></b></li><li><b><a href=”https://www.sofi.com/learn/content/average-savings-by-age/” target=”_blank”>What is the average savings by age?</a></b></li></ul><p></p><p></p><p class=”block-paragraph”></p><p class=”rich-text”></p><p><i>This article originally appeared on <a href=”https://www.sofi.com/learn/content/places-to-store-short-term-savings/” target=”_blank”>SoFi.com</a> and was syndicated by <a href=”https://mediafeed.org/” target=”_blank”>MediaFeed.org</a>.</i></p><p><i><br/></i></p><p></p><p></p><p><i><strong>SoFi Money</strong><br/>SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA /SIPC. Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. </i></p><p><i><br/></i></p><p><i>Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.</i></p><p><i><br/>Each business day, cash deposits in SoFi Money cash management accounts are swept to one or more sweep program banks where it earns a variable interest rate and is eligible for FDIC insurance. <strong>FDIC Insurance does not immediately apply. Coverage begins when funds arrive at a program bank, usually within two business days of deposit.</strong> </i></p><p><i><br/></i></p><p><i>There are currently six banks available to accept these deposits, making customers eligible for up to $1,500,000 of FDIC insurance (six banks, $250,000 per bank). If the number of available banks changes, or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be lower.</i></p><p><i><br/></i></p><p><i> For more information on FDIC insurance coverage, please visit www.FDIC.gov  . Customers are responsible for monitoring their total assets at each Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. The deposits in SoFi Money or at Program Banks are not covered by SIPC.</i></p><p><i><br/><strong>External Websites:</strong> The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.</i></p><p><i><br/><strong>Financial Tips &amp; Strategies:</strong> The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.</i><br/></p></div>

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