4 Ways the Upper Class Handles Inflation That the Middle Class Could Learn From

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Inflation can be a double-edged sword. On one side, it can cut into your budget by raising the cost of essentials like housing, food, and transportation. But it can also be harnessed to grow your wealth, such as by increasing the interest you earn on your savings.

In some sense, being wealthy makes it easier to benefit from inflation. If you have $100 in savings, the difference between a 1% annual percentage yield (APY) on a savings account and a 5% APY is only $4. But if you have $100,000 saved, then the difference is $4,000.

Still, it’s better to earn that extra $4 on a $100 in savings than, say, lose money due to bank fees or pay interest when borrowing money if your balance turns negative. And over time, you can build up your savings and investments more to benefit from inflation further, much like many wealthy people do.

Specifically, consider the following four ways the upper class handles inflation that the middle class could learn from.

Staying Invested

While periods of inflation might stress you out and make you feel like you need to pull all of your money out of investments so that you have more cash on hand, that can be counterproductive. Instead, many wealthy people benefit from sticking with diversified investing.

“First off, they know how to stay invested in the right places, even when the economy is shaky. They spread their money across real estate, stocks, and commodities — assets that usually go up in value when prices rise,” said Jaqueline Schadeck, CEO at Golden Wealth Strategies and host of PBS show My Money Mentors.

Preparing for the Unexpected

Another way the upper class handles inflation is that they tend to be prepared for the unexpected.

“Inflation can sometimes be a surprise to many families, especially for bills that are paid yearly. For example, a lot of people have been caught off guard by how much insurance and property taxes have increased just in the last year,” said Patrick Marcinko, financial advisor at Bogart Wealth.

While it’s hard to know what those price increases will be, you can prepare by budgeting for emergencies and variability.

“Wealthy individuals ensure they have an emergency fund, or cash set aside, that can help them cover surprise expenses. This helps them avoid relying on debt when expenses turn out to be a lot more than they had expected,” said Marcinko.

Note, however, that where you keep your emergency fund matters.

“If inflation is higher than the interest rate on savings, the purchasing power of your money is eroding,” added Marcinko.

Some high-yield savings accounts can keep up with or exceed inflation. And if you have excess savings beyond what’s needed for an emergency fund — experts often suggest around 3-6 months of living expenses — then that could prompt you to keep setting aside money for investments that can potentially keep pace with or outgain inflation.

Limiting Debt

In addition to avoiding debt by building a cushion for yourself, also consider limiting debt in other areas, like taking out large car loans.

A smart move is to cut back on borrowing when it’s expensive, said Schadeck. 

Given that interest rates are high as the Federal Reserve tries to tame inflation, it can make sense to limit debt now so that you’re not paying more. Instead, you could aim to take on debt as needed when rates are low and lock in those rates, such as how many homeowners were able to secure fixed-rate mortgages below 3% in 2020 and 2021.

“While some of us might keep taking out loans no matter what, the wealthy avoid piling on high-interest debt that can get out of hand fast. They prefer fixed-rate loans, which are a lot easier to handle when everything else is getting pricier,” said Schadeck.

Staying Flexible

Lastly, it can help to take a flexible approach to your finances, rather than feeling like you have to keep doing the same things you were before inflation took off. You can have big-picture goals but that might require some adjustments along the way as conditions change.

The wealthy “stick to their financial plans but stay flexible. They’re always tweaking and adjusting their strategies to roll with the economic punches and jump on new investment opportunities that pop up. By picking up these strategies, we can better handle inflation and keep our financial game strong,” said Schadeck.

Final Note: Breaking the Paycheck-to-Paycheck Cycle

If you feel like you can’t benefit from these tips because you can’t seem to break the paycheck-to-paycheck cycle — meaning there’s nothing left to build an emergency fund or invest, for example — know that there are ways out.

“When inflation begins to climb, it can seem like expenses are spiraling higher. It’s important to pause and take some time to track your expenses. It is not the most glamorous activity, but it is crucial to know where your money is going each month,” said Marcinko.

“Once you have a handle on where your money is going, it will be easier to identify areas that could be adjusted, and hopefully leave you with more money at the end of the month,” he added.

And if you realize that there’s not much you can realistically cut, you might instead work on the income side of the equation.

“Many folks don’t actually have a debt or paycheck-to-paycheck problem; they have an income problem,” said Schadeck. To start, try to increase your main income source, she added.

If that doesn’t work — e.g., your boss isn’t open to discussing a promotion, and you can’t seem to find another full-time job — there are still other options.

“In today’s world, it’s easier than ever to pick up a side hustle or extra gig work to boost your income. By doing this, you can get ahead and build a cushion,” said Schadeck. “And remember, you don’t have to keep grinding on the side forever — just until you reach a place where you’re comfortable and no longer living paycheck to paycheck.”

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