In today’s economic environment, inflation and high interest rates have become pressing concerns for individuals, families, businesses, and investors alike. While these economic conditions are not new, the current economic climate has placed additional pressure on consumers, making it more challenging to manage day-to-day finances. The impact of inflation on the cost of living and the effects of rising interest rates on borrowing and savings are significant. Fortunately, while these conditions can feel daunting, there are a number of strategies you can employ to protect your wealth during inflation and high interest rates.

Understanding how inflation and high interest rates work and how they affect personal finances can give you a clear advantage in adjusting your financial plans. This article will explore what these economic factors mean, why they happen, and provide a wide range of strategies for managing them effectively. Whether you're looking to safeguard your savings, reduce debt, or adjust your investment strategy, understanding how to adapt is crucial for long-term financial health and engaging with a Financial Planner can help you maintain and adjust these plans moving forward during any economic time period.

Inflation vs. Interest Rates: What You Need to Know

Before we explore financial strategies, it’s essential to understand the relationship between inflation and interest rates – two key factors that shape the economy and personal wealth.

What is Inflation?

Inflation occurs when the prices of goods and services increase over time, reducing the purchasing power of money. This means that your dollar buys less than it did before. Key impacts of inflation include:

• Higher Cost of Living – essentials like groceries, gas, and housing become more expensive.
• Budget Strain – Households, especially lower-income families, feel the pressure as necessities take up a larger portion of their income.
• Savings Erosion – if inflation is 6%, but your savings account earns 1% interest, then your money effectively loses 5% of its value annually.

Inflation today can be seen across the United States. The Consumer Price Index measures this change in prices over time and is commonly used as an inflation gauge.

What are Interest Rates?

Interest rates represent the cost of borrowing money, typically set by central banks like the U.S. Federal Reserve. These interest rates set by the Federal Reserve influence:

• Loan Affordability – higher interest rates mean more expensive mortgages, car loans, and credit card payments.
• Economic Slowdown – When borrowing becomes costly, consumer spending and business investments may decline.
• Savings Opportunities – Rising interest rates can lead to higher returns on savings accounts and CDs.

How Inflation and Interest Rates are Connected

These two factors are connected. Central banks use interest rates as a tool to manage the economy. When inflation is high, central banks typically raise interest rates to slow down the economy and stabilize prices. However, high interest rates can also make it more difficult for consumers and businesses to borrow money, affecting both short-term and long-term financial decisions.

Understanding how inflation and interest rates affect your finances can help you make smarter financial decisions, whether it’s adjusting your budget, managing debt, or optimizing your investments.

How Inflation and High Interest Rates Impact Your Finances

Impact on Personal Finances:

Rising inflation and increasing interest rates affect everyday finances in multiple ways.  Here’s how:

• Rising Costs of Goods and Services: Inflation drives up the cost of essentials like food, gas, and utilities, forcing consumers to spend more on daily necessities.
  • Example: Grocery prices rise because producers pay more for raw materials, passing those costs on to consumers.
  • The result: This eats away at your budget without any additional purchasing.
• Increased Borrowing Costs: When interest rates rise, borrowing becomes more expensive placing more strain on household budgets. Additionally, individuals with variable-rate loans may see their rates increase, further increasing costs. Common borrowing affects include:
  • Mortgages – higher rates mean larger monthly payments
  • Car loans & Student loans – Increased cost for financing
  • Credit cards – Interest on outstanding balances increases, making debt harder to pay off.
• Erosion of Savings: Inflation erodes the real value of your savings over time. If you have a savings account earning 1% interest and inflation is running at 6%, the real value of your savings is decreasing by 5% annually. While interest rates might increase on savings accounts, they may still not outpace inflation, meaning you’re effectively losing money if your funds are not invested in inflation-protected assets or instruments that return more.

Impact on Investments:

Rising inflation and interest rates create uncertainty in many financial vehicles, including the stock market, real estate, and fixed income returns. It’s essential you understand how these may be affected so that you and your financial planner can take action to protect your wealth.

• Stock Market Volatility: Higher borrowing costs reduce profits and stock valuations. High inflation also erodes future earnings, making stocks less attractive than other investments. However, inflation-resistant stocks in energy and consumer staples may provide stability.
• Real Estate: Higher mortgage rates deter homebuyers, slowing sales and possibly decreasing property values. However, rental properties may hedge against inflation, allowing landlords to raise rents with rising costs.
• Fixed income returns: The return you were getting on fixed income investments may be diminished.  If you had a CD for ten years that has been paying 4% and inflation is at 6%, you are now losing purchasing power on the investment.

4 Key Strategies to Protect Your Wealth from Inflation and High Interest Rates

Inflation and rising interest rates can significantly impact your budget, debt, savings, and investments. Here are four essential strategies to protect your financial future and build long-term resilience.

1. Reevaluate Your Budget and Cut Unnecessary Expenses

The first step in responding to inflation is to reevaluate your budget. As the cost of living rises, it’s crucial to adjust your spending habits to maintain financial stability.

Track and Reduce Expenses

Start by tracking every expense for a month to identify areas where you can cut back. Many people spend money on things they don’t need or are unaware of recurring subscriptions. Look at your budget and ask yourself whether you can reduce any discretionary expenses like entertainment, dining out, or travel. Consider using a budgeting tool like Mint or YNAB to help you optimize your spending.

• Authors note: check with your child before canceling a gaming subscription; they could lose all of their “loot?”. Apparently, this is the equivalent of my parents giving away my Millennium Falcon toy.

Prioritize Needs Over Wants

Focus on meeting your basic needs first—housing, food, healthcare, and transportation. Afterward, allocate funds for critical non-essentials like savings, debt repayment, and investing. Limiting luxury expenses will help alleviate budget strain. Consider cutting premium subscriptions, expensive gym memberships, or impulse shopping.

Swap for Affordable Alternatives

Shop smarter by switching to store-brand products instead of name-brand items. Use coupons, take advantage of sales, or buy in bulk for items that have a long shelf life. Switching to more affordable alternatives can save you a significant amount over time.

2. Reduce High-Interest Debt to Minimize Financial Strain

Inflation isn’t the only financial burden—rising interest rates increase the cost of debt. When interest rates are high, paying off high-interest debt is one of the best ways to protect your financial health. Here are three methods to consider as you work to reduce your debt:

• Consolidate or Refinance Debt: If you can, combine various high-interest debts into a single lower-interest loan. For instance, moving credit card debt to a balance with a reduced interest rate can lower your monthly payments. Furthermore, refinancing your mortgage or auto loan can help you obtain better interest rates, leading to long-term savings.
  • Authors note: Many credit cards offer zero percent interest on balance transfers and can help you pay off debt faster using the same amount per month or less.
• Use the Debt Avalanche Method: Focus on paying off the highest-interest debt  first. Once that’s paid off, apply the money you were using for that debt to the next highest interest rate. This strategy will help reduce the overall interest you pay in the long run.
• Minimize Credit Card Usage: If you maintain a balance each month, interest charges can escalate rapidly. Think about using cash or debit cards to prevent adding more high-interest debt.

3. Build and Optimize Your Savings to Outpace Inflation

With inflation reducing the value of cash, strategic saving and investing can help preserve and grow your wealth.

• Maximize High-Yield Savings Accounts: Although savings account interest rates have generally been low in the past, many banks are currently providing higher yields due to increased benchmark rates set by central banks. To optimize the returns on your emergency fund, seek out online banks or credit unions that offer attractive rates on savings accounts. Additionally, consult with your financial advisor about placing your savings in a money market account that offers a rate superior to that of your current bank.
• Diversify Your Investments: A well-balanced portfolio, tailored to your needs, helps combat inflation by diversifying investments, allowing some areas of your portfolio to outperform inflation while other areas of your portfolio help to reduce risk. Not relying on one investment can help hedge against inflation and interest rates risk.
• Leverage Credit Card Rewards:  As average debt keeps increasing, paying off your credit card bill each month opens up opportunities with rewards. Forbes magazine reports that credit card debt has reached 1.17 trillion dollars. This situation has intensified competition among credit cards offering rewards. If you can pay off your balance monthly, you can earn rewards that can assist with your budget like:
  • Travel rewards
  • Cash-back
  • Hotel stays
  • Specific industry rewards like 5% on gas or groceries
• Invest in Assets That Hedge Against Inflation: During high inflation, conventional savings accounts often fail to yield enough growth to match increasing living costs. Explore investments in assets such as gold, real estate, and commodities—these have typically been reliable options during inflationary times. Furthermore, examine stocks in sectors like energy and utilities, as they often thrive when inflation rises high.

4. Work with a CFP^® for Expert Financial Planning

Professional guidance can make a significant difference when navigating inflation, interest rate changes, and investment strategies.  However, ensuring that the financial planner you work with is qualified and experienced is important.

• Why Choose a CFP^®?: This certification, awarded by the Certified Financial Planner Board, shows the planner has met rigorous education, examination, and experience requirements criteria.
  • The CFP® designation is a mark of professionalism and skill.
  • Certified Financial Planners (CFP®) have rigorous training in wealth management.
  • They provide unbiased, fiduciary advice tailored to your financial goals.

They help optimize tax strategies, retirement planning, and risk management.

• How A CFP^® Can Help You: Proactive planning with a CFP® can help safeguard your wealth, even in uncertain financial conditions.
  • Create a personalized inflation-proof investment strategy.
  • Recommend tax-efficient savings plans for education and retirement.
  • Help adjust financial plans based on economic changes.

A financial planner with a CFP^® designation is trained to provide comprehensive advice, covering everything from retirement planning and investment strategies to tax and estate planning. With inflation and high interest rates creating uncertainty, working with a CFP® can help you develop a tailored financial strategy to manage risk, optimize savings, and maximize returns. They are also bound by a fiduciary duty, meaning they are legally obligated to act in your best interests.

Final Takeaways

Navigating inflation and high interest rates requires careful planning, flexibility, and strategic thinking. Inflation and high interest rates don’t have to derail your financial future. By making smart financial choices today, you can safeguard and grow your wealth over the long term. By reevaluating your budget, focusing on reducing high-interest debt, optimizing savings, diversifying income streams, and taking advantage of refinancing opportunities, you can withstand the challenges posed by rising prices and borrowing costs.

It’s also important to maintain a long-term perspective. While inflation and high interest rates present immediate hurdles, these are not permanent economic conditions. By staying informed, adjusting your financial strategy, and being proactive, you can position yourself for future financial success.

Author: Jason Graper, CFP^® | Allegheny Financial Group | February 2025

The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is an SEC Registered Investment Advisor.

Sources:

•  Average Credit Card Debt Study 2025 – Forbes Advisor
• Consumer Price Index - CPI Home : U.S. Bureau of Labor Statistics
• Federal Reserve Board - Home
• CFP Board | Certified Financial Planner Board of Standards, Inc.
• What Is Inflation and How Does Inflation Affect Investments?
• Five tips for protecting your money during high inflation | UNFCU
• Navigating Inflation: Three Tips For Managing Finances During Uncertainty