How to Beat Inflation
By Nina J on The Capital
I’ve been meaning to write this article since 2018 but never got around to it. In that time, inflation has made common things you buy 4.2% more expensive which sucks but better late than never I guess.
I see all of these personal finance articles where bloggers try to push you on fancy credit cards for points. That’s all great but no one ever talks about basic strategies to beat inflation. Inflation is why your parents talk about being able to buy candy at the store for a nickel and you’d like “WTF — can’t buy anything with a nickel anymore. A pair of Reese’s cups are like $2.29”. It’s the idea that every year, the same item that used to cost XX now costs XX plus some amount because your dollar isn’t worth as much as it was last year.
The most commonly used metric for inflation CPI or Consumer Price Index which looks at the price for an urban consumer of a bundle of common everyday goods/services over time. CPI is commonly baselined to 1982 = 100 and CPI in 2020 is 257. AKA this basket of common goods costs 156% MORE than the same basket of goods in 1982.
That’s pretty awful. So what should you do about it?
- Open a high yield savings account. If you are putting money into a normal savings account like a bank, you are getting 0.13% interest on it based on the national average. That’s not even close to the rate of inflation so keeping money in a normal savings account is like losing 1.87% of the value on it every year (assuming ~2% inflation). Instead, you should put your money in a high yield savings account that gives you ~1.75%-1.85% interest on your savings. These accounts are still FDIC insured so they function like any bank savings account in terms of consumer protection and you can withdraw your money whenever you want just like any bank savings account. The best savings rates on the market today are 1.85% from Citi Accelerate (requires minimum of $500 per month balance to avoid monthly fees), 1.85% from Citizens Bank Access (requires a minimum deposit of $5,000 to start), 1.75% from PNC Bank High Yield Savings (no minimum), and 1.70% from Marcus by Goldman Sachs (no minimum).
These interest rates are indexed generally to the Federal Reserve’s fund rate so it may change if the Fed decides to reduce interest rates (which it does to promote spending if it doesn’t believe the economy is doing too hot).
2. If you aren’t going to need your money for 6-months to 1-year+, you can also look into Certificate of Deposits (CDs). CDs lock you into a specific interest rate, which may be higher than the current savings interest rates. However, you are generally not allowed to withdraw your money until your CD matures without facing a penalty which makes it less flexible than a high yield savings account. 6-month CDs from Marcus by Goldman Sachs are currently offering a lower effective annual interest rate than their high yield savings product by quite a bit so I would not invest in a 6-month CD unless you expect the Fed Funds Rate to decrease substantially in the next couple months (taking high yield savings rates down with it). That would be the only situation in which it would make sense to lock in this lower rate with less flexibility on withdrawing your money. 12-month CDs from Marcus by GS are currently offering 2.05% (0.20–0.30% higher than most of the high yield savings accounts). However, again you will be locked in to holding your money in the CD until it matures if you do not want to face a penalty. There’s also a minimum amount of $500 on the Marcus CDs. The yield curve is super flat right now which means that the additional interest rate gain you get from locking your money into a longer-term CD is super low. For a 5-year CD on Marcus, you are getting a 2.15% rate (only 0.10% better than the 12-month CD) and yet locking your money in for 4 more years! This would only make sense to invest in if you believe interest rates were going to tank in the next couple years (impending recession) and want to lock in the rate we have today or you really just do not need to see/use this money for 5 years and want to just invest it in something with a guaranteed return.
3. You can also invest in treasury bonds. Treasury bonds are similar to CDs but instead of buying them from a bank, they are bonds that the US government issues so they are very, very low risk. The key benefit of investing in treasury bonds is that the interest is exempt from local/state income tax (you still have to pay federal tax on the interest). In contrast, any interest from a CD or from a high yield savings account will be subject to local, state, and federal income tax. There are multiple variants of treasury bonds including ones with coupons / without coupons, different maturity dates, and inflation protection / floating rates. Treasury bond yields are super low right now (1.40% for 1-year, 1.90% for a 30-year bond) and not extremely interesting from an interest rate perspective but can be a good investment option if you live in a state with high local / state taxes or if you want a safe haven for your money. The Finance Buff has a pretty good guide to how to buy Treasury bonds directly from the government (TreasuryDirect) or over brokerage platforms like Fidelity/Vanguard/Charles Schwab.
4. Invest in stock market ETFs. All of the above options with high yield savings accounts, CDs, and treasury bonds are super safe but the yields aren’t super interesting. If you are willing to take on a bit more risk in return for a higher return, you can look into investing in the stock market. Investing in the stock market in the long-run yields on average 6% returns per year but it can be a bumpy ride with some years of negative returns and other two-digit percentage returns. The market is pretty much at an all-time high right now so there is obviously a chance for a market correction. However, academic studies show that attempting to “time the market” and enter at the right time generally results in worst overall return results than just consistently investing over time. I (and many of my finance friends) held out of the stock market a couple of years ago expecting a recession which didn’t materialize and lost out on one of the biggest stock market surges in a while so you never really know what is going to happen. I also do some individual stock picking on Robinhood but overall, this is significantly riskier than just investing in an ETF (electronically traded fund) which represents a bundle of many stocks. I only put money in individual stock picking that I’m ok with losing and view it more as fun/gambling versus investing. When you invest in individual stocks, you are exposing yourself to significant individual company risk v. having that risk spread out across a huge portfolio of companies when you invest in an ETF. I only invest in individual stocks I would be happy to hold for a long time, really believe in, and seem to have good secular trends behind. Holding a stock for more than a year before selling is also preferable so that you are taxed at the lower long-term capital gains tax rate on any gains from the sale instead of ordinary income tax rates.
Anyways, there are a ton of extremely smart people with access to significantly more data, computation power, and resources than you trying to figure out the prices of individual companies. It’s generally better to just invest in a passively managed ETF with low fees. When looking for funds to buy, avoid funds that are actively managed and charge you a high fee (expense ratio). These have been shown not to perform as well as passively managed ETFs net of fees in the long run. The average fund carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest. The only thing you know for certain is that you are losing that annual fee money every year into perpetuity. Instead, take a look at passively managed ETFs with low expense fees. Vanguard has a number of great ETFs, some of which only have 0.07% expense ratios.
5. Alternative investment vehicles. There’s also been a rise in alternative investment vehicles that allow you to invest in real estate (FundRise, CrowdStreet), peer-to-peer lending (Prosper, LendingClub), etc. These provide returns of around 4–12% but lack transparency about the risk exposure you are putting your money to. I haven’t personally invested in any P2P lending sites because I don’t feel confident in how these marketplaces determine/assess creditworthiness of lenders but it may be interesting to look into if you are looking for a slightly different type of investment or looking to diversify your portfolio a bit.
Those are great ideas but what if I don’t have any savings to invest?
If you don’t have substantial savings, you can still beat inflation by getting cash back on purchases. These options DO NOT require signing up for a bunch of credit cards that ruin your credit score or spend more money trying to hit their spending targets to receive signup bonuses.
- Rakuten: Rakuten (used to be called Ebates) gives you cashback for purchases just by opening the website through their link. Basically, Rakuten gets an affiliate bonus for navigating you to the site and they share a portion of that affiliate bonus with you. They have a Google Chrome plugin that conveniently alerts you when you could be getting cashback on a site you are on. It allows you to just click a button to re-navigate through their affiliate link and get the cashback. Cashback varies from 1% to 20% on holidays. I’ve used Rakuten for 4 years and have received more than $400 in cashback. They send me checks every couple of months with my cashback for that period and I deposit the checks remotely into my bank account.
2. Ibotta. Ibotta is a similar concept to Rakuten Ebates. It’s an app that similarly gives you cashback for shopping through it (mostly focused on mobile shopping instead of computer browsing). It also has coupons for products in grocery stores that you can clip and get cashback on for uploading your receipts. I never use this feature because it’s not worth the time investment from my perspective and most of the dollar amounts are too small to be interesting (25 cents — $1 coupons). I’ve received over $350 in cashback from purchases made through Ibotta (all through the mobile shopping cashback feature). Ibotta lets you withdraw via Venmo which is super convenient though you need a minimum amount to withdraw.
3. Drop is another cash back app, also centered around mobile shopping. You can also get ~0.5% cashback on purchases with a linked credit/debit card from purchases at specific retailers. I picked Lyft, Uber, Trader Joe’s, and Starbucks. Drop only lets you redeem via gift cards but you can get Amazon gift cards which are as good as cash. This app doesn’t tell me my lifetime earnings but I’ve redeemed $90 worth of Amazon gift cards from it already and I still have ~$90 worth of points so I imagine that I’ve probably earned ~$180 worth of cashback through this app.
4. I also really like Seated. It only works in cities but it allows you to get cashback for making reservations at local restaurants. You do have to upload a receipt at the end of your experience which is kind of annoying but I’ve made $90 back on this app which is pretty good for super low effort.
There are a ton of other cashback apps like Dosh (cashback for hotel stays and in-store purchases) and Freebird (cashback for Uber/Lyft rides to local bars/restaurants) but they haven’t been as interesting in terms of cashback for me personally. Overall, I care about beating inflation and only invest in cashback apps that are super low effort from a time perspective because the rest aren’t really worth the effort.
Alright, now go beat inflation!