In the past 12 months or so, the rate of inflation has gone up by 4%. And although inflation is starting to drop, it's still hitting Americans' wallets hard.
With inflation comes the rising cost of living. Prices for things like gas, groceries, used vehicles, food, auto insurance, and housing have all increased from year to year. But individual purchasing power – that is, the quantity of products and services your money can buy – hasn’t kept up.
As a result of these rising costs, many Americans struggle to make ends meet, much less set aside money for personal emergencies. But in times of high inflation, it’s more crucial than ever to build an emergency fund. Not only can an emergency savings fund protect your household from unforeseen expenses like medical bills or car repairs, but it can also give you some much-needed peace of mind.
The sooner you can start setting aside some money, the more prepared you’ll be for if – and when – the time comes that you need it.
Strategies for Saving During Inflation
Even if you don’t believe you’re in a position to start saving up for emergencies, chances are you can still set aside a little money each month. With a little time and persistence, you should be able to build a robust emergency fund that can keep your personal finances safe.
Here are the top strategies for how to build an emergency fund during inflation:
- Set aside a small amount each month. There are many saving mistakes to avoid during inflation, but one of them is to start saving without a plan. Write down some small, achievable savings goals and start working toward them. For example, say you want to save $2,000 in the next 12 months. You’ll need to set aside roughly $167 a month to achieve that goal. Once you’ve done that, move on to a slightly bigger savings goal. Continue like this until you feel comfortable with the amount you’ve saved.
- Review your budget and cut unnecessary expenses. If you haven’t reviewed your budget in a while, chances are that you’re spending more than you should in certain areas. Take a look at things like your subscription services and cancel the ones you don’t really need. Contact your insurance companies and try to negotiate a lower monthly premium. Then, put that extra cash directly into your emergency savings fund.
- Take on a side hustle. Depending on your skills and interests, you could take on a side hustle and contribute any earnings to your emergency fund. For example, the average dog walker on Rover makes $19.31 an hour. If you work an additional five hours a week, you could earn around $386 a month.
- Automate your savings. Some financial institutions let you choose a specific amount or a percentage of your paycheck and transfer that directly into a separate savings account each month. This method takes the guesswork and planning out of saving.
- Look for “hidden money”. Perhaps you’ve been missing out on tax credits, or maybe you’re a beneficiary for a relative’s old life insurance policy. Or you could be due for a windfall in the form of a work bonus or tax refund. Whatever the case, finding extra money could help you build an emergency fund.
- Get the family involved. Start talking openly about the need to save money with your loved ones. Setting clear goals and getting your family involved can make it easier to save money. Plus, having other people there with you can help keep you accountable.
Savings Vehicles to Consider for Inflation
If you've managed to save some money and want to watch it grow, the first thing to do is put your emergency fund in a high-yield account with a potentially high return on your deposits. Some of the most popular savings products to consider during inflation include:
- High-yield savings account. One option is a high-yield savings account. Like traditional savings accounts, these are a secure place to put your money. Some banks are currently offering Annual Percentage Yields (APYs) of upwards of 4%. In contrast, traditional savings accounts can be as low as 0.01% APY.
- Money market account. A money market account is similar to a high-yield savings account. The key difference is that these accounts typically come with a debit card and checks, so you can easily access your money. Some money market accounts are currently offering APYs of nearly 4% on balances below $100,000.
- Series I savings bonds. These bonds typically have a long maturity period – anywhere from five to 30 years. They also have a fixed rate, which is currently 4.3%, and are designed to maintain their value even during periods of high inflation. The downside is that you may lose out on interest if you cash in your Series I bond before it matures.
- Certificates of Deposit (CDs). If you’re considering where to put an emergency fund in 2023, another option is a certificate of deposit (CD). CDs let you earn interest on a specific amount of money over a period of time, typically between a couple months up to five years. The downside is that you can’t access the money until the CD has matured.
- Roth IRA. Although meant for retirement purposes, a Roth IRA comes with potentially higher-than-average returns on your money. The average return ranges from around 5.75% to 9.45%, depending on how aggressively you invest. You may be taxed on early withdrawal, but you can still access the funds in times of emergencies.
- Other low-risk investments. Other options to consider include exchange-traded funds (ETFs), Treasury inflation-protected securities (TIPs), fixed annuities, and stocks (dividend-paying, not high-growth). Any investment comes with some level of risk, but the rate of returns is often higher than what you’d find elsewhere.
In an inflationary environment, high-yield savings accounts like CDs and money market accounts are generally quite safe. Because these products come with fixed interest rates, you'll know in advance how much your money will earn over a specific period of time. This can put your mind at ease as you save for emergencies, even during inflation.
Having an emergency fund is vital to your personal finances, especially during times of economic uncertainty or high inflation. After all, unplanned personal, medical, and familial expenses come up all the time. The sooner you can start setting aside some money, the more prepared you’ll be for if – and when – the time comes that you need it. And even if you never end up needing to use it, that extra money can give you some peace of mind and alleviate financial stress.