Inflation is running hot. The costs of many things we buy, from gas and groceries to vehicles, have shot up as we transition out of the pandemic. The most recent Consumer Price Index (CPI) report from Bureau of Labor Statistics showed inflation was 7.9% over the prior 12-month period.

The Russian invasion of Ukraine caused already high prices in oil and other commodities to move higher. The U.S. Federal Reserve took notice of the rising inflation and moved to combat it by raising the federal funds rate by 0.25% earlier this month. Perhaps more importantly, they signaled plans to increase rates several more times this year, which means short-term interest rates will likely be moving higher.

Here are several ideas to consider as you navigate the inflationary environment in your personal finances:

1. Delay major purchases on inflated items: We have seen shortages and high prices on vehicles and home appliances due to supply chain issues resulting from the pandemic. If you can hold off on these purchases until supplies and prices normalize, you may be able to find a better deal.

2. Pay down variable rate debt: As interest rates increase, the rates on variable rate loans will also go up. Variable rates are most commonly seen with credit cards, private student loans, and other consumer debt. If you have variable rate debt, look to aggressively pay these down or refinance them into fixed rate programs to help protect against rising interest rates.

3. Evaluate your mortgage: Mortgage rates have been at historically low levels over the past couple of years. If you have a mortgage rate over 4.5%, consider refinancing to lock in a lower rate.

4. Review your expenses: Look to trim or cut items that don’t add value in your life so you can accommodate higher costs in other areas.

5. Consider I bonds: The U.S. Treasury offers savings bonds that help protect against inflation. These are called Series I savings bonds, commonly known as I bonds. I bonds are unique because their interest rate is composed of two factors, a base rate and an inflation rate. The inflation rate adjusts every six months based on changes in CPI (Consumer Price Index). The current rate on new I bonds is 7.12%.

There are a few important features and limits to be aware of with I bonds:

  • They cannot be cashed in during the first 12 months.
  • If you cash them in within five years of purchase, you lose three months interest.
  • An individual can buy up to $10,000 of these bonds through Treasury Direct each year. You can purchase an additional $5,000 of paper I bonds with your tax refund by filing a form along with your tax return.

6. Review your investment portfolio: If you have not reviewed or rebalanced your investment portfolio recently, now would be a good time. Many investors got overloaded on growth and tech stocks during the recent low inflation cycle. Other sectors such as financials and energy may have their time in the sun during a more inflationary period.

Bond investments are often sensitive to interest rate moves. When interest rates move up, the price of a bond goes down. Bonds are often an important component of a diversified portfolio. It would be a good idea to review how sensitive your bond investments are to increases in interest rates.

If you are unsure how, seek out a qualified financial adviser to help. Overall, ensuring you have a diversified and balanced investment strategy may be beneficial during the coming period. Managing your personal finances can be a challenge during an inflationary period.

No one knows exactly what will happen or how long this period will last. However, taking some steps now to manage your debt, expenses, and investments can put you in a better financial position in this transitioning environment.

Lucas Bucl is a CERTIFIED FINANCIAL PLANNER professional and a member of Financial Planning Association of Greater Kansas City. He is a partner at Aspyre Wealth Partners in Overland Park, Kansas. Lucas helps clients define what success means to them, and then craft and execute a plan to achieve it.

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