5 Savings Mistakes to Avoid During Times of Inflation

$20 bills in a wallet, in a file photo. Justin Sullivan/Getty Images

Inflation has an impact on your money over time, including what you can buy with the dollars you have. Given this, it can be worrisome if high inflation looms on the horizon. Should you stop saving if your funds won’t have as much purchasing power later? Or should you save more than before?

As you consider your own approach, steer clear of these common savings errors. Doing so could help you ride through the ups and downs of interest rates and still sleep well at night.

Mistake No. 1: Parking All Funds in a Savings Account

If you regularly put money into a savings account, it’s important to pay attention to the rate of return your funds receive. “Although banks give interest to your savings, they’re so low that you won’t be able to catch up with high inflation,” says Paul Sundin, a CPA and CEO of Emparion, a retirement services provider. “In a few years, your savings won’t have the same value they have now.”

To see this in action, consider the following scenario: perhaps you put $1,000 into a savings account with an interest rate of 2 percent during 2021. In 2022, the money in the account will be $1,020 ($1,000 plus the $20 in interest). If inflation is 4 percent, however, the money won’t keep up with the increased cost of products and services.

That said, having ready access to some funds can be helpful, especially in times of emergency. You might consider keeping three to six months’ worth of expenses in a savings account. If you lose your job or run into tough financial times, you’ll be able to take out funds to cover costs until your situation improves.

Mistake No. 2: Not Adjusting Your Spending

Inflation is often reflected in a rise in prices related to living expenses and consumer goods. If a TV you want to buy costs $1,000 in 2021 and the inflation rate is 5 percent, in 2022 the same set would be $1,050 ($1,000 plus the $50 in inflation). This creep in costs isn’t always obvious from week to week, but over time, your budget will likely feel the strain.

Rather than using extra funds to pay for items and reducing the amount you’re saving for the future, you might consider other spending strategies. “One way to keep your savings in check is to cut down on unnecessary expenses,” Sundin says. “When inflation is particularly high, small sacrifices can help add to your savings.”

Double-check your subscriptions and regular bills. Look for lower prices when shopping for staples and cancel any services you can do without. Those dollars can be redirected toward your long-term savings plan.

Mistake No. 3: Not Considering Real Estate Investments

Investing in properties during periods of inflation may help you weather financial storms. There are several ways to incorporate real estate into your long-term savings strategy. One approach is to purchase a home while fixed interest rates are low and keep the place during times of high inflation. “With a fixed-rate mortgage, your principal and interest payment will stay the same for the life of the loan even as your other expenses—and hopefully your income—are all rising,” says Greg McBride, chief financial analyst at Bankrate.com.

If you already own a home, you might look at refinancing options. “Refinancing an existing mortgage to lock in today’s low rates is another way to protect against future inflation and free up additional funds every month to absorb the increasing costs we’re seeing on so many other household expenses,” McBride says. For homeowners looking to invest further, purchasing another property and renting it might work. In areas where real estate prices are rising, your investment could grow in a way that keeps up with—or surpasses—inflation rates.

Mistake No. 4: Not Paying Down Debt

Carrying high balances on credit cards, personal loans, and other debts can work against you, especially if inflation skyrockets. Perhaps you have a variable interest rate tied to your loans. That rate could increase and cause you to spend more than planned as you pay off the debt.

Getting rid of balances can also free up your funds to place into savings vehicles. Rather than making a $200 payment on a credit card each month, for instance, you could focus on paying off the entire balance and then investing $200 each month.

Mistake No. 5: Failing to Review Your Plan

Just as every individual’s situation is unique, periods of inflation don’t follow a textbook plan. Since it’s impossible to tell exactly what the next months and years will bring, it can be helpful to periodically revisit your financial plan.

You can spend time reviewing your accounts or set up a time to meet with your financial adviser. Based on the current environment, you might decide to make changes or invest in different assets. “While commodities are in vogue whenever inflation picks up, investors want to be cautious about putting too many eggs in this basket,” McBride says. “Look at these as a way to diversify, perhaps, but only with a modest portion of your portfolio.”

Rachel Hartman is a freelance writer with a background in business and finance. Her work has appeared in national and international publications for more than 10 years. She resides in Miami and travels frequently.