7 Ways To Inflation-Proof Your Emergency Savings Fund

If you didn’t think much about inflation a couple of years ago, you probably do now, as the cost of goods and services have skyrocketed, taking a bigger chunk out of the average American’s income.

When you put money into a regular savings account, it essentially degrades in value, not keeping up with the cost of inflation. Emergency savings — that money you stash for unexpected expenses and emergencies — is money you want to be growing at the pace of, or faster than inflation.

If you look back at the past 60 years, you’ll see just how far we’ve come, and not in a good way. According to Kirill Semenov, CFP and wealth advisor with Intellicapital, in 1960, the median home cost less than $12,000. It’s over $400,000 today. 

“If household incomes and housing prices moved at the same rate, an average house should still cost under $100,000,” he explained. “As the power of your dollar is depleting every day, it’s important to not get left behind.”

So how do you inflation-proof your emergency savings? Here’s a look at advice from financial experts.

Brandon Galici, a CFP with Galici Financial, encouraged consumers to keep emergency funds in a separate high-yield savings account. 

“This provides you with more interest than a typical savings account, is FDIC-insured and still offers quick access to your money.”

Galici said not to worry too much about outpacing inflation with your emergency savings. “The main objective of this account is to provide you with quick access to your money in case something unexpected happens.”

David Reyes, founder and chief investment officer at Reyes Financial Architecture, added that you should look for accounts with competitive rates — which are currently around 4% to 5% — to minimize losses.

You should be mindful that you don’t have too much money parked in cash, however.

“Once your emergency fund is healthy — three to six months of living expenses — you can consider investing in a brokerage account,” Galici said. “This can help you build wealth for the long term while offering you more flexibility than typical retirement accounts.”

Additionally, these types of accounts often offer check-writing capabilities, Reyes said.

A couple of other options are higher risk, but can deliver inflation-beating returns, such as Series I savings bonds issued by the U.S. Treasury, Reyes said. “These bonds offer interest rates that adjust to inflation. However, there are purchase limits and penalties for early withdrawals.”

Another investment option is short-term certificates of deposit (CDs), Reyes said. While these aren’t as high-risk if you leave them untouched, they can incur early withdrawal penalties if you try to cash them out sooner.

“Lock in a fixed interest rate for a specific period, [such as] three to 12 months. Choose terms with rates exceeding projected inflation,” Reyes said.

If you really want to push the risk factor to increase your earnings, Reyes suggested fractional shares, which allow you to invest small amounts in stocks or ETFs, potentially outpacing inflation over time. “Choose low-cost, diversified options and be prepared for market volatility,” he warned.

You can also look into robo-advisors, he said, which are “automated investment platforms offer[ing] diversified portfolios with minimal fees.” These are suitable for long-term goals and require a higher risk tolerance

One of the most inflation-proof investments is real estate, according to Steve Davis, CEO of Total Wealth Academy.

“Keeping your money in income-producing assets like real estate protects you in both the up and down markets. Speculating in the stock market puts you at high risk in a down market,” he explained.

Furthermore, real estate values rise with inflation, keeping your wealth growing. 

“Real estate also makes money off rental income, equity buildup and equity capture, giving you rates of return over 20%,” he explained. “While this form of investing does require some education and effort, it builds wealth and beats inflation more effectively than anything else.”

While your cash may or may not be very fluid depending on what kind of investment you have, the end result could be well worth it.

Other types of investments that will tie up your cash for sometime but may pay off in the end include the following, as recommended by Reyes.

Dividend-Paying Stocks 

Invest in companies with a history of regular dividend payments, providing a potential income stream alongside capital appreciation. However, stock prices can fluctuate.

Real Estate Investment Trusts (REITs)

These are like a ‘basket’ of income-producing properties, offering potential dividends and long-term appreciation. “REITs are subject to market fluctuations and property-specific risks,” Reyes pointed out. These will not be your safest bet, but could be a very lucrative one.

If you’ve got a longer window still until retirement and enough money on hand, Reyes said to consider peer-to-peer lending platforms where you can lend money to individuals or businesses in exchange for interest payments. “While there are risks involved, peer-to-peer lending can provide higher returns compared to traditional savings accounts.”