For those who are living paycheck to paycheck, the thought of trying to build wealth or plan for retirement might feel strongly out of reach. It is certainly difficult to think about long-term financial goals when you are barely making ends meet, but the current high cost of living should not completely preclude you from investing in your future. Compound interest is a financial strategy worth exploring during inflationary times because it can actually provide an intelligent hedge against future periods of high inflation.

The Basics of Inflation

In macroeconomic terms, inflation is what happens when regional economies go through periods of lower purchasing power. The basic mechanism of inflation involves consumer prices going up while salaries stagnate or prove to be insufficient. There are various ways to measure inflation, but the one method that truly applies to everyday Americans is the consumer price Index (CPI), which in the U.S. is measured and published by the Bureau of Labor Statistics. The CPI has increased by nearly 9% since May 2021, which means that your paycheck feels at least 10% lighter compared to last year.

Microeconomics researchers at the University of Michigan believe that the real impact of inflation on American families is closer to 15%, particularly when we take into account fuel prices, mortgage interest rates, and the higher cost of rents. Americans are hardly the only ones dealing with inflation in 2022; in Argentina, for example, the CPI has increased by more than 60% on an annual basis.

The current economic trend of global inflation is tied to various geopolitical factors, such as the Russian invasion of Ukraine, the lower production output in China, and the slow pace of recovery from the pandemic. We feel these reverberations because we live in a globalized economy. With the very few exceptions of tiny nations that happen to enjoy considerable wealth, inflation has become a global issue that cannot be escaped, but this does not mean it cannot be mitigated.

In all economies driven by capitalism and free markets, the rate of inflation will always outpace the yield of compound interest; this is the result of financial competition, and it allows regulators to avoid the kind of severe inefficiencies that can spiral down into an economic depression.

If we take the 15% real CPI estimated by the University of Michigan, we see that it is much higher than the 5.5% rate of interest set by the U.S. Federal Reserve Board in August 2022. It is also much higher than the most enticing compound interest high-yield savings account, which offers a 2.25% annual percentage yield (APY). Even the most lucrative five-year certificate of deposit was only paying about 3.5% in August 2022.

In order for an American investor to defeat inflation in 2022, the annual return on an asset portfolio would have to be greater than 15%. We have already established that compound interest alone will not catch up to inflation. You might be able to accomplish this through stock investing or real estate, but those are investing activities that convey a certain amount of risk, and which are not guaranteed to produce returns.

Compound Interest and Inflation

We know that inflation reduces our purchasing power along with the value of our savings. Obviously, this is not an ideal situation for building wealth, which is why compounding is one of the best financial strategies to hedge against inflation. To see how compound interest can help you deal with inflation, let’s use one of our calculators to figure out the following scenario:

• In the year 2012, a nurse in Idaho deposited $1,000 into a money market account, paying 1% APY compounded on a daily basis. She also made a firm commitment to contribute $500 each month to the account.
• In 2022, the nurse will have $64,206 in her money market account. She has effectively grown her account balance into a safety net that can help her alleviate some of the negative effects of inflation. While her income may have lost 15% of purchasing power over the last 12 months or so, she could very well tap into her account in order to cover monetary shortfalls.

Time will always be the most important factor in the calculation of compound interest. If the nurse in the example above had not applied a compounding strategy ten years ago, her financial ability to deal with inflation today would be sharply diminished. Since we can’t really make up for the lost time, we must keep in mind that failing to build wealth now will affect us in the future. Now is the time to get started with compounding because the inflation we consider to be extraordinary now may become the new normal down the line. Any funds that you are able to deposit for compounding today might be the funds that save you from catastrophic financial ruin tomorrow.

All in all, if you decide to wait until inflation levels off to start compounding, you would be missing out on daily interest being paid and reinvested into your portfolio. We don’t know if things will ever get back to normal; arguably, wages would need to be raised at some point, but this may take longer than expected. Time is one of those things that we can’t get back once it is gone. The time to take advantage of compound interest will always be now. Waiting for things to get better does not make sense; you don’t want to lose out on the exponential nature of compound interest. The longer you wait, the less you will be able to earn.

1. Protect Income Streams

The pandemic meant that income sources were at risk for many, not just those in retirement. Rental properties went unoccupied, jobs disappeared, and many investments that used to be safe havens were no longer available. The safety of investment income was also challenged during this time. Protecting income streams continues to be a key concern in the retirement years, especially when it comes to investment income. If you find your income streams at risk, it might be time to consider adding a few passive income sources to your revenue streams.

2. Post-pandemic Spending Habits

The pandemic changed the way many people spend money. Lockdown put a damper on things like vacations, air travel, and restaurants. People found that it was much easier to save with these extras not available. Unfortunately, many developed an unrealistic picture of what it takes to live in retirement. Now, with travel and some of these extras returning, it is time to rethink your spending to account for them. New retirees have to be especially careful of underestimating their budget due to forgetting to include entertainment and other items in the budget that are once again becoming an important part of life.

3. Investing During a Down Market

Investing in an up market when you are trying to accumulate wealth pre-retirement is different from investing once you begin withdrawing money. Also, many stocks have taken a plunge in the post-pandemic world. When you are accumulating shares, the down market means that you can take advantage of some good deals. After retirement, when you are withdrawing your funds, it could mean that you must sell your shares at a loss. The best bet is to have a majority of your savings in low-risk investments if you are post-retirement and must withdraw your funds.

4. Beware of Inflation

If you have purchased items like gas and food lately, you already know that inflation is on the rise. Inflation and the cost of goods can mean draining your retirement more quickly. Taking on additional risks, such as equity positions, might help to balance the cost of rising food and gasoline prices. It is expected that the supply chain issues will begin to resolve over the next 12 months, which will help to alleviate this burden for retirees. Increasing income-producing investments and finding ways to cut back are the most effective ways to offset the drain on your retirement account caused by inflation.

5. Find the Right Post-Retirement Investing Strategy

In post-retirement, it is important to find an investment strategy that is a perfect fit. This means not taking on the risk and investing at higher rates of return than necessary. For instance, if you perform an analysis, and it says that a 5 percent rate of return will be sufficient, then you do not need to invest at a 10 percent rate of return and take on the extra risk. You can find the perfect rate of return using this compound interest calculator. One strategy is to separate what you need for retirement from what you intend to pass on to your heirs.

6. Plan in Five-Year Segments

Financial advisors suggest planning for retirement by breaking it down into five-year segments. Every five years after retirement has its own unique set of needs. What you need between 65 and 70 will be different from what you need from 80 to 85. Investing during the first few five-year segments should be done more conservatively than money invested in the later years. In developing your investment strategy, it is important to remember that shares sold for income during a market decline can never be replaced.

7. 60-40 Rule Is Outdated

The 60-40 rule says that your portfolio should be 60 percent equities and 40 percent bonds, but this only works when bond yields are above inflation. Currently, bonds are paying yields below inflation, which is called a “negative real rate.” Now, you can no longer use bonds to reduce risk. This means that it might be time to consult a professional for some creative ideas about how to overcome this challenge, such as investing in strategies that have the potential to make money in both up and down markets.

8. Consider Real Assets

Real assets, such as real estate, are a popular investment strategy during times of high inflation. Other real assets include commodities and natural resources. Investment instruments like REITs and oil and gas pipelines can often pay substantial dividends. They also appreciate in value as oil prices rise. When you see rising prices, you need to think about them as an investment during times of uncertainty. Another option is to consider owning a rental yourself. This can afford higher market returns than traditional investments in a market decline.

9. Make the Mental Shift

In the pre-retirement years, you are in an accumulation mindset. After retirement, you need to shift to a preservation strategy. Just as you drew up a plan for the accumulation of wealth, you must also develop a planned strategy for drawing down your retirement savings. In developing this strategy, make sure to include all sources of income, including annuities, IRAs, Social Security, and any other retirement accounts.

The pandemic changed the markets, and it changed the way you need to invest for everyone. This is especially true for those in their post-retirement years. The biggest risk is that you will draw down your retirement savings too quickly and end up in financial difficulty. One of the biggest challenges is maintaining income as you watch stock prices fall. These tips should help you have a little peace of mind and develop a strategy that will help your retirement savings last through your later retirement years.

That isn’t necessarily the case! There are things you can do to successfully invest in the future, even with inflation on the rise. This guide goes over the various ways you can make up for the rising costs of everyday life and still afford to put money into a retirement fund. The secret solution may be something you know little about today. That’s why we’ve taken the opportunity to discuss it with you so that you’re 100 percent aware that you have options awaiting you.

Making Compound Interest Work Well for You

Compound interest is the answer to all of your financial worries in the present. It allows you to see a return on your investment and even profit off the interest that your money has earned for you. If you’re curious about how it works or even how much you can save by retirement age, we highly suggest familiarizing yourself with a compound interest calculator. It provides you with accurate information that makes investing much easier for people on a tight budget.

When interest compounds, it earns even more interest. The larger the sum of money you invest, the greater returns you’ll see. The interest makes money for you. That’s why it’s crucial to sock away even the smallest sum of money when you can. Cutting back on unnecessary expenses and becoming creative in fulfilling your day-to-day needs ensures that you get what you deserve in the future financially.

Ways to Combat Inflation So You Have More to Invest

It may feel like every item you come across has risen in price substantially, making it hard to live in the moment, let alone invest in your future. That doesn’t mean that you can’t hack the system, though. There are ways to beat inflation so you can use what you’ve saved to put up towards retirement. You just need to know what to do and when to do it.

That’s where this guide comes in handy. It’s a valuable resource that makes spending, saving, and investing much easier. Finally, you’ll have the tools needed to get the most out of every dollar you earn and put towards your future. It will only be a matter of time before you get so good at beating inflation that it no longer scares you to hear the subject discussed.

Here are some suggestions for you to refer to that can help you save during times of inflation:

Rethink what’s essential and non-essential in your budget.

Be very realistic about the things you need now to survive and thrive. Remove any non-essential items from your budget or rethink the ways you can acquire them. You also have the option to postpone purchases until things have gotten better financially. When doing this, you may discover an entirely new way to acquire items that you would typically pay full price for that day. Instead, you may think about buying them secondhand or bartering for them so you can invest the money you saved.

Consider driving less or commuting with a relative or friend.

Gas prices are astronomical in many states around the nation. You may want to reconsider driving as much and work from home more. If that isn’t an option for you, pooling your resources and taking turns carpooling with a family member or a friend can be very helpful. Each person does their part to reduce spending by allowing more than one person to travel with them while traveling from Point A to Point B and back again. If you work with people who are all for this idea, check to see who wants to drive first and then offer to reciprocate.

Stop buying single servings of items.

It may not seem like a big deal, but it is financially. You pay more for a single serving of an item than you do multiple servings of items. It may seem more practical to get a small bag of chips for lunch because it’s convenient, but in reality, you’re paying more per ounce when you purchase items this way. You can stop throwing away money at the supermarket by being very deliberate about the way you shop.

Sell items that you and your family no longer need or want.

Not only are you making space for the things that you love or may require in the future, but you’re also getting money for the items that you’ve finally decided to let go of by selling them. You can have a garage sale or post them online. The biggest thing to remember is to invest your earnings so that you’ll have the brightest future possible.

Put off major repairs or work on them slowly.

A home remodeling may not be your best option at the moment. You can wait until supply costs have dropped or choose to work on a project slowly. Instead of trying to do everything at once, pick an area of the home to complete over a longer span of time. Take the money that you would have spent on the repairs or remodel and invest it.

As you can see, there are many reasons why you should take all the extra money that you save and invest it into your future. You never know what life has in store for you. You’ll be one step closer to financial security despite what’s taking place at the moment. You’ll be well-prepared with money invested in a way that continues to grow your savings year after year.

Live a Good Life Today and Long into the Future Despite What Takes Place with the Economy

You can beat inflation and still invest in your financial future. Once you have the knowledge and skills to fight rising costs, you’ll never let someone else’s view of value affect your comfort and lifestyle. Instead, you’ll rest assured knowing that you can live a good life now without making too many sacrifices to your retirement funds. You’ll even share what you’ve learned with other people who could benefit from your experiences.

By continually evaluating your financial situation and finding areas to improve on, you’re able to achieve several things. You reduce your expenses in the moment and free up more of your earnings for saving and investing. You also make it very clear that no matter how tough life gets financially, you’re always one step ahead of the economy. Learning to live on less now by choice prevents you from being forced to cut back out of necessity.