A CFP's 5-step plan to combat stubborn inflation

Inflation is like that houseguest who just won’t leave. Even though it has cooled since the peak of the COVID-19 pandemic, inflation is still hanging around 3% — higher than the Federal Reserve’s 2% goal.

But what really matters to your wallet is the impact inflation is having on your finances. Prices today are 23.3% higher than they were in February 2020 before the pandemic started, which means nearly everything costs more.

The Federal Reserve cut interest rates by one percentage point in 2024, but they’re being careful about future cuts, as prices aren’t coming down as quickly as they’d like. Put simply: Inflation isn’t going away anytime soon, so it’s probably a good idea to adjust your financial plan accordingly.

If you need help with your financial plan, I’m sharing my CFP-approved guidance to help you combat stubborn inflation.

Step 1: Update your budget for today’s higher prices

First, you need to know exactly how inflation is affecting your spending. National inflation numbers don’t tell the whole story because prices rise differently across different categories.

Look at your spending over the last three months and pay close attention to areas where you notice big price jumps. This includes food costs (both groceries and eating out), housing, transportation, medical costs and utilities.

For example, grocery prices rose 1.9% from a year ago and are about 27.4% more expensive than they were before the pandemic, according to data from the Bureau of Labor Statistics.

—What to do: Adjust your budget to allow 5-10% more for these essential categories. This might mean cutting back on non-essentials or finding ways to earn more.

—Expert tip: Use a budgeting app to track your personal inflation rate — or how much your expenses have increased over time. Your experience might be better or worse than the national average depending on what you typically buy.

Step 2: Make your savings work harder

With the Fed cutting rates, many banks offering high-yield savings accounts and CDs have also started lowering their rates. However, yields are still higher than inflation, even if they continue to drop, meaning you can still earn positive returns on your savings.

—What to do: Shop around for better rates: Many online banks still offer over 4% APY, significantly higher than traditional brick-and-mortar banks. Check out Bankrate’s picks for high-yield savings accounts to find the best options.Look into I bonds: These government savings bonds are designed to protect against inflation. Part of an I bond’s return is variable and tied to the inflation rate. Learn more about how to buy I bonds.Set up a CD ladder: With rates likely to fall gradually, consider creating a CD ladder with 3-month, 6-month and 1-year CDs. This locks in today’s higher rates while still giving you some access to your money. Use Bankrate’s CD ladder calculator to see how much interest you could earn.

—Expert tip: Keep your emergency fund (3-6 months of expenses) in high-yield savings accounts for immediate access, then consider using I bonds or a CD ladder for any additional cash beyond that amount.

Step 3: Adjust your investments to fight inflation

Some investments do much better during inflation than others. If you’re a seasoned investor, now’s the time to make sure your portfolio includes assets that historically held up well when prices rise.

—What to do: Add more value stocks: Companies with strong current cash flows tend to do better during inflation than growth companies whose value depends on future earnings. Here’s Bankrate’s picks for best value ETFs.Consider real assets: Real estate, infrastructure and some commodities have historically been good inflation hedges. Real estate investment trusts (REITs) (especially those with short-term leases like apartments) may adjust to inflation quicker.Look at inflation-protected securities: Beyond I bonds, Treasury Inflation-Protected Securities (TIPS) can have a place in the fixed-income part of your portfolio.Diversify globally: Different countries experience inflation differently, so international investments can provide balance. Here are some tips for investing in foreign markets.

—Expert tip: Don’t completely overhaul your long-term investment plan because of inflation. Instead, make smaller, targeted changes while keeping your overall financial goals in mind. New to investing? Start with a low-cost index fund or robo-adviser that automatically diversifies your investments based on your risk tolerance and time horizon.

Step 4: Use debt wisely while protecting your credit

One silver lining of inflation: It reduces the real value of fixed-rate debt over time. But managing debt carefully is still important while you navigate this economic environment.

—What to do: Focus on fixed-rate debt: If you have variable-rate debt like credit cards or adjustable-rate mortgages, consider consolidating into fixed-rate options when possible. Mortgage rates have dropped but remain elevated, so refinancing may make sense only in certain situations.Be strategic about borrowing: For major purchases that will hold or increase their value, fixed-rate financing can work in your favor during inflation. The real cost of repaying these loans goes down as inflation continues.Pay down high-interest debt aggressively: If your cash reserves are earning less than the interest rate on your debt (particularly on credit cards), consider paying down high-interest debt more aggressively, even during inflation. The return from eliminating high-interest debt typically outweighs what you might earn elsewhere.Watch for “shrinkflation” in financial products: Just like products that get smaller while prices stay the same, some financial products may offer worse terms for the same cost. Read the fine print carefully on new credit cards and loans.

—Expert tip: Maintain good credit by checking your credit reports regularly and fix any issues quickly. A strong credit score helps you get the best rates on any new loans or financing, which is important when interest rates are more volatile.

Step 5: Boost your income to stay ahead

Perhaps the best way to fight inflation is to increase how much you earn. While the job market has cooled, there are still options.

—What to do: Ask for a raise with inflation in mind. Come prepared with information about market rates for your role and your contributions to the company.Build in-demand skills: Find out which skills lead to higher pay in your industry and invest in developing those through training or certifications.Create additional income streams: Side hustles or passive income can provide extra financial cushion. Consider freelancing, consulting or using your existing assets (like renting out a room) to generate more income.

—Expert tip: When asking for a raise, directly mention inflation’s impact. Try something like: “Since our last salary discussion, inflation has effectively reduced my pay by X percent. I’d like to discuss an adjustment that accounts for this while also taking into account my contributions.”

Bottom line

Staying financially solid during an inflationary period means staying informed, remaining flexible and taking proactive steps rather than hoping inflation will simply go away. While we likely won’t see very low inflation anytime soon, taking action now can help keep your financial plans on track despite higher prices.

Remember that inflation affects everyone differently based on their spending habits and life stage. The best strategy is one that’s tailored to your specific situation and fits into your overall financial plan.