Many Americans have felt the squeeze of inflation for the past few years, and many workers' salaries haven't kept up. Inflation appears to be calming down, but interest rates remain high, posing a challenge for investors, according to CNN.
See: How much money will Americans have in their bank accounts in 2024?
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Should you stick to short-term savings or focus on long-term investments?
Here are some things to consider:
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An emergency fund is absolutely necessary
First, keep your rainy day emergency fund in a safe and easily accessible place, such as a high-yield savings account. These accounts still boast interest rates of 5% or higher. This is higher than the current inflation rate and helps your money work better for you.
Ideally, you should have three to six months worth of expenses set aside for unexpected expenses, such as medical bills or car repairs.
Read: Average cost of groceries per month – how much should you spend?
Retirement is within reach if you invest now.
Next, let's take a look at how much you'll save for retirement. Make sure you're contributing to your workplace's 401(k) plan, especially if your workplace offers matching contributions. This is free money, so I don't want to turn it down.
If you have extra money to invest for long-term growth potential, consider low-fee equity index funds. These invest in baskets of stocks, like the S&P 500, rather than individual stocks. Not only do index funds provide instant diversification, they also save you money in fees in the long run.
According to Investopedia, the S&P 500 index has an average return of 9.9%, which often exceeds inflation and can help your money grow even with small investments. Past performance doesn't necessarily guarantee future returns, but by steadily putting money into the market, you may be able to grow your wealth over time.
Budgeting, spending cuts, and fiscal responsibility can reduce inflation.
Rising prices may put pressure on your budget. Take time to consider your priorities and financial goals. Tracking your spending in an app or spreadsheet will highlight places to cut back, like food delivery, gym memberships, and streaming services. You can use that extra money to invest.
To increase your savings and investments, you don't have to cut all your expenses or cut back on them altogether. When your paycheck isn't as much as it used to be, it's important to be intentional about what you're spending your money on and where it's going.
Although inflation can erode your savings, investments have historically outpaced inflation over the long term. The long-term rise to wealth includes inevitable ups and downs. But most of the time, time is on your side.
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This article originally appeared on GOBankingRates.com: Inflation Is Falling, But So Is My Paycheck: How Should I Investment?
