Inflation is at a 40-year high. 10 tips from the pros on how to invest and save

On Thursday, the Labor Department released the latest consumer price index data, which revealed that the rate of U.S. inflation rose again in January to 7.5%, which is a 40-year high. This suggests that “the upward pressure on consumer prices is unlikely to relent much anytime soon,” writes MarketWatch’s Jeffrey Bartash of the data. Furthermore, what’s called the core price index — this index strips out the sometimes-volatile arenas of food and energy — rose 6% in January, as compared to a year prior. No doubt, this news has investors and savers nervous about what to do with their money. So we asked experts how consumers should think about investing and saving in this high-inflation period. 

1. Invest smartly in your employer-sponsored retirement plan — and a brokerage account

Investing is a key to beating inflation: For example, the average annualized return of the S&P 500 is roughly 10%, data shows. That’s why Stephen Carrigg, certified financial planner and private wealth adviser at Integrated Partners, advises investing in your company’s workplace retirement account, and “open a brokerage account for additional savings that you can view as your mid-to long-term savings and take advantage of compounding,” says Carrigg. Financial gurus Suze Orman and Ramit Sethi have also both underscored the importance of investing to beat inflation.

It’s important to ensure you have a diversified investment portfolio, Carrigg adds: This means one that’s built from varied assets like stock funds and bond funds so that your exposure to any one type of asset is limited in the event of a downturn. Read our MarketWatch Picks guide to diversification here.

2. Consider TIPS

Treasury Inflation-Protected Securities (TIPS) are government bonds that help protect you from inflation. “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the consumer price index,” the government explains.

3. Weigh real estate and commodities

Grace Yung, certified financial planner at Midtown Financial Group, tells MarketWatch Picks that “tangible assets such as real estate or commodities are also something to consider” during times of inflation. As Morningstar recently noted on the commodities front, “In 2021, natural gas, oil, and broad commodity baskets have led the commodity universe in year-to-date returns, during a period where inflation fears have mounted.” And on the real estate front, that’s something Warren Buffett has also espoused as a way to deal with inflation.

4. Think about value stocks in the consumer staples arena

Snigdha Kumar, head of product operations for Digit, says investing in things like food and energy — which are always in high demand — is a smart choice because staples are essentials, and companies selling them have the ability to price items higher while riding the wave of inflation.

5. Look for tax efficienciecs

“Look for tax efficiency in your brokerage account which will help combat inflation,” says Carrigg. To maximize tax efficiency, investments that tend to lose less of their returns to taxes are better suited for taxable accounts while those that lose more of their returns to taxes should be designated in tax-advantaged accounts. Essentially, if you want to keep more of your money, tax-efficient investing will minimize your tax burden, which means you pay less on what your investments earn. “Open a Roth IRA and max it out because tax-free accounts can be very valuable,” says Carrigg.

6. Look at companies that can raise prices relatively easily without harming the business

Warren Buffett has long been a proponent of investing in businesses with low capital needs, particularly during times of inflation. Seek out companies that have “an ability to increase prices rather easily,” Buffett also once wrote. If you can invest in a company that’s able to raise their prices without any loss of revenue, Buffett encourages doing so because it creates profit.

7. Don’t keep an excess of cash on hand

“If you’re someone who keeps a large amount of liquid cash on hand beyond what you might need for an emergency fund, then you should consider investing the excess. The stock market is low right now, but over a long rough time frame, that investment can earn a much higher interest rate in the stock market than it would in a savings account,” says Chanelle Bessette, banking specialist at NerdWallet.

8. That said, don’t neglect your savings

An emergency fund is key: “Open a savings account and put three to six months of expenses there that stays in cash and is only for emergencies,” says Carrigg. Though most rates on savings accounts are low, “it’s much better to earn some interest instead of none at all, so for that reason, consumers should keep an eye out for high-yield online savings accounts which tend to offer rates that are much higher than the industry average,” says Bessette.

And you may also want monies for short-term savings. “Consider a certificate of deposit (CD), but don’t chase yield by investing in a maturity that exceeds how long you can really live without the money. There isn’t enough yield to justify the stretch and the early withdrawal penalty more than consumes the difference,” says Greg McBride, chief financial analyst at Bankrate.

9. Go deep into what you spend, and how you can save

When inflation is high like it is, you often get hit with higher prices everywhere from the grocery store to the gas pump. So keep tabs on your budget and follow a spending plan to keep track of your funds every month. If you’re spending money in places that are enjoyable but maybe not essential, taking a break or pausing this type of expense can lead to savings in unexpected places.

10. Don’t panic

Yes, inflation is high, but if you’re investing, cutting costs where you can, and avoiding (if possible) highly inflated items, you’re a step ahead of many others.