Inflation Is Falling, But So Is My Paycheck: How Should I Invest?
Written by
Hanna Horvath
Edited by
Nicholas Morine
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Many Americans have felt the squeeze of inflation over the past few years, and many workers’ paychecks have not kept up. While inflation does seem to be cooling, per CNN, interest rates are still high, posing a challenge for investors.
Should you stick with short-term savings or focus on longer-term investing moves?
Here’s what you should consider.
An Emergency Fund Is an Absolute Must
First, make sure you have a rainy-day emergency fund parked someplace safe and accessible, like a high-yield savings account. These accounts are still boasting interest rates of 5% or more — which is higher than the current rate of inflation and can help your money work harder for you.
Ideally, you should have three to six months’ worth of expenses set aside for unexpected expenses, like medical bills or a car repair.
Retirement Is Within Reach — If You Invest Now
Next, look at your retirement savings. Make sure you’re contributing to your workplace’s 401(k) plan, especially if they offer matching contributions. This is free money you don’t want to turn down.
If you have additional money to invest for long-term growth potential, consider low-fee stock index funds. These invest in baskets of stocks like the S&P 500 rather than individual stocks. Not only do index funds offer instant diversification, but they’ll also save you money on fees in the long run.
The average return of the S&P 500 index is 9.9%, according to Investopedia, which often outpaces inflation and can help your money grow — even if you only have a small amount to invest. While past performance doesn’t always guarantee future returns, steadily putting money into the market can often help you grow your wealth over time.
Budgeting, Spending Cuts, and Fiscal Responsibility Can Mitigate Inflation
With prices going up, your budget may feel squeezed. Take some time to consider your priorities and what your financial goals are. Tracking your spending — either with an app or on a spreadsheet — can highlight places to cut back, like food delivery, gym memberships, or streaming services. You can use that extra money to put towards your investments.
Saving and investing more doesn’t require cutting all your expenses and avoiding spending altogether. When your paycheck doesn’t go as far as it used to, it’s important to be intentional about what you’re spending money on and where your money is going.
While inflation can eat away at your savings, historically investments have out-performed inflation over the long term. The climb to long-term wealth includes inevitable ups and downs. But in most cases, you have time on your side.
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