Experts recommend prioritizing necessities and paying down debt when prices are high.
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April 19, 2022 1:37 PM EDT

If you’ve purchased gas, groceries, a car, a home, or just about anything else lately, you’ve noticed that things are getting more expensive, quickly. In March, inflation reached 8.5%, representing the biggest year-over-year jump in over 4 decades.

Inflation is typically the result of an imbalance in supply or demand. What makes this period of inflation somewhat unique, however, is that the economy is experiencing pressure from both sides, explains Lindsey Bell, the chief markets and money strategist for Ally Financial.

“On the supply side, obviously COVID was the leading driver, where there were significant bottlenecks in supply chains, and a slowdown in production and shipping,” she said, adding that talent shortages and the war in Ukraine have recently added to supply constraints. “There’s also been elevated demand in this post-pandemic period, partially driven by the stimulus that put money into the consumer’s hands, as well as into the market.”

Many Americans have little experience saving, spending, budgeting, and investing in such a high inflation environment. Here is how the experts recommend prioritizing your finances in the months ahead.

Step 1: Make a budget

Having a budget is always the best way to keep costs under control, and in recent years inflation has caused many Americans to take up the practice. According to a survey by debt.com, 80% budgeted their expenses in 2021, compared with only 68% in 2019.

If you’re among the 20% that still hasn’t mapped out your spending now is the time to do it, “just to keep track of how you’re spending and what you’re spending on, given that there’s been significant price changes in different categories,” says Bell.

A few simple cost cutting measures that can help counteract rising prices, according to Bell, include auditing and cancelling subscription services, and consulting online price comparison sites before filling up on gas. “At the grocery store one of the easiest things to do is to trade down from name brands to private label brands,” she says.

Step 2: Pay off existing variable debt

Many put paying off debt towards the bottom of their financial priority list, doing so with whatever money they have left over at the end of the month. Paying down debt—especially variable debt, like credit cards, lines of credit, personal loans, and variable rate mortgages—should now come second to living expenses, and well ahead of investing, says author, financial advisor, and founder of Live, Learn, Plan, Jay Zigmont.

“While there are a lot of things you can do to invest, if you got something like 16% or 18% interest on a credit card, you’re not going to beat that with any investment,” he says.

Step 3: Maintain a rainy day fund

As prices soar it can be tempting to seek out investments that will keep pace with inflation. Before you consider where to invest, however, the experts recommend setting aside enough cash to overcome any immediate financial challenges. Simple as it may sound, less than half of Americans have enough in savings to cover a $1,000 emergency expense.

“If you have debt, pay it off first, but second is putting it in an emergency fund,” says Zigmont, adding that those funds will only accumulate a fraction of a percentage point in interest. “An emergency fund will stay in a high yield savings account, and frankly you’ll effectively lose money because of inflation, but it has a job—to be there in case of emergency—so you don’t want to risk that.”

Step 4: Explore the bond market

Those who are debt-free and have 3- to 6-months worth of living expenses squirreled away should then explore investment opportunities that are both safe and guaranteed to keep pace with inflation.

The first such product that both Bell and Zigmont suggest exploring is I-Bonds, which are backed by the U.S. Treasury and tied to the Consumer Price Index. That’s because its interest rate is adjusted every six months—in May and November—based on the rate of inflation, and can be cashed out after a year.

“If you think inflation will continue to move higher over the next six months, it’s not a bad place to be, but you can only put $10,000 into it every year, so it does limit your investment,” says Bell.

The next government-backed investment to consider is called a Treasury Inflation-Protected Securities, or TIPS. “Dipping your toes into the bond market with TIPS, if you don’t need that money for two-plus years, is a more beneficial place to be,” adds Bell.

Bonds can be purchased through your bank, broker, or on the TreasuryDirect website.

Step 5: Invest in your home

Home prices have been skyrocketing lately, which is great news for existing homeowners, and not so great for those who are looking to get into the market. Rising interest rates might cool the market somewhat, but Bell says renters should probably hang on a little longer before purchasing their first home.

Despite the increasing cost of building supplies and labor, she also advises homeowners to invest in their current properties before purchasing a new home.

“Home improvements continue to be economical, so long as home prices are going higher,” she says, adding that, “economists expect home prices to remain elevated, even though mortgage rates are rising.”

The bottom line

Between stimulus checks, meme stocks and the crypto craze, the oddities and opportunities of the market inspired many Americans to dip their toes into the investment waters over the last few years. With inflation on the rise, however, now is the time to pull back from those riskier opportunities, and return to some tried and true practices for protecting wealth. That means budgeting, paying off debt and establishing an emergency fund before putting your money into the market, and investing in safer assets that are tied to inflation.

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