A Strategy to Earn More on Your Money Than the Rate of Inflation

Inflation erodes the purchasing power of money, making it essential to grow savings at a rate that outpaces rising costs. Keeping cash in a low-interest savings account often results in losing value in real terms. To preserve and increase wealth, individuals must explore investments that generate returns above inflation.

Growth-Oriented Equity Investments

Investing in stocks with strong growth potential can help counteract inflation. Companies that reinvest earnings into expansion and innovation tend to see their stock prices rise. Technology firms, for example, benefit from advancements in artificial intelligence, cloud computing, and automation. Nvidia and Microsoft have consistently increased earnings through reinvestment in new developments.

For diversification, exchange-traded funds (ETFs) and mutual funds focused on growth sectors provide exposure to multiple companies. Funds tracking the Nasdaq-100 or S&P 500 Growth Index include businesses with strong earnings momentum, reducing the risk of selecting individual stocks that may underperform. Actively managed funds, such as the Fidelity Blue Chip Growth Fund, aim to identify emerging leaders before they reach peak valuations.

Dividend growth stocks also hedge against inflation. Companies like Procter & Gamble and Johnson & Johnson have a history of increasing dividend payouts, providing both capital appreciation and rising income. Reinvesting dividends through a dividend reinvestment plan (DRIP) enhances long-term returns by compounding gains.

Inflation-Linked Debt Instruments

Fixed-income investments generally struggle to keep pace with inflation, but some debt instruments are designed to address this issue. Treasury Inflation-Protected Securities (TIPS) adjust their principal value based on the Consumer Price Index (CPI). When inflation rises, the principal amount increases, leading to higher interest payments and preserving real value.

Series I Savings Bonds offer another inflation-protected option. These bonds combine a fixed interest rate with a variable rate that resets every six months based on CPI data. Unlike traditional bonds, I Bonds do not lose value in a rising rate environment. Investors can purchase up to $10,000 in electronic I Bonds annually through the U.S. Treasury, with an additional $5,000 available if using a federal tax refund. Tax advantages, including exemption from state and local taxes and potential deferral of federal taxes until redemption, add to their appeal.

Some corporate bonds include inflation-linked features, though they are less common. These bonds adjust interest payments based on inflation benchmarks, offering a hedge against rising costs while providing higher yields than government-backed alternatives. However, they carry credit risk, requiring investors to assess the issuer’s financial health. Credit ratings from agencies like Moody’s or S&P Global help gauge the likelihood of default, with investment-grade bonds offering more stability than high-yield options.

Municipal inflation-linked bonds provide tax advantages while protecting against inflation. Interest earned on these bonds is typically exempt from federal income tax and, in some cases, state and local taxes. This makes them attractive to investors in higher tax brackets seeking inflation-adjusted returns. Availability varies by state and municipality, so researching specific offerings is necessary.

Real Estate Holdings for Passive Income

Owning income-generating properties provides steady cash flow while serving as a hedge against inflation. Rental properties, whether residential or commercial, allow investors to benefit from rising real estate values and increasing rental rates. As inflation pushes up the cost of living, landlords can adjust rents accordingly. Commercial real estate leases often include built-in rent escalations, further protecting against inflation.

For those who prefer not to manage properties directly, real estate investment trusts (REITs) offer exposure to property markets. Publicly traded REITs provide liquidity, allowing investors to buy and sell shares like stocks while benefiting from rental income and property appreciation. Many REITs specialize in sectors such as industrial warehouses, healthcare facilities, or apartment complexes, enabling investors to target areas with strong demand. Mortgage REITs, which invest in real estate debt, generate income through interest payments and can perform well when property values rise.

Short-term rental platforms like Airbnb and Vrbo offer another way to generate income. Investors in high-demand tourist or business destinations can achieve higher returns compared to traditional long-term leases, though this approach requires active management and compliance with local regulations. Some cities impose restrictions on short-term rentals, including occupancy limits and licensing requirements, which must be considered before pursuing this strategy.

Commodity-Based Positions

Investing in commodities helps preserve wealth when inflation erodes the value of fiat currency. Hard assets like gold and silver have historically served as stores of value, particularly during economic instability. Gold, in particular, tends to appreciate when inflation rises, as investors seek a hedge against declining purchasing power. Unlike stocks or bonds, physical gold is not tied to corporate earnings or interest rate policies, making it an independent asset class.

Beyond precious metals, energy commodities like crude oil and natural gas often benefit from inflationary environments. Rising demand for fuel, coupled with supply constraints, can drive price increases. Futures contracts allow traders to speculate on price movements, while ETFs tracking energy commodities provide a more accessible way to gain exposure. Agricultural commodities such as wheat, corn, and soybeans also tend to appreciate when inflation pushes up food prices, making them another potential hedge.

Adjusting Cash Holdings to Guard Against Inflation

Holding too much cash in traditional savings accounts leads to diminished purchasing power. Inflation reduces the real value of money, making it important to manage cash holdings strategically.

High-yield savings accounts and money market funds offer better alternatives to standard bank accounts. Online banks and credit unions often provide interest rates that exceed those of traditional brick-and-mortar institutions. Money market funds, which invest in short-term government and corporate debt, provide slightly higher yields while maintaining liquidity. Some funds, such as those holding Treasury bills, benefit from rising interest rates, making them more attractive during inflationary periods.

Certificates of deposit (CDs) with short maturities allow savers to lock in higher rates while maintaining flexibility. Laddering CDs—staggering maturity dates—helps balance returns with liquidity needs. Treasury bills, which mature in one year or less, serve a similar function while offering the security of being backed by the U.S. government. These instruments help preserve capital while earning returns that offset inflation’s impact.

Tax Adjustments for Real Returns

Investment returns are subject to taxation, which can further erode purchasing power if not managed effectively. Inflation-adjusted tax strategies help investors retain more of their earnings by minimizing liabilities and maximizing after-tax returns.

Tax-advantaged accounts, such as Roth IRAs and Health Savings Accounts (HSAs), allow for tax-free growth and withdrawals under qualifying conditions. Unlike traditional IRAs or 401(k)s, Roth accounts are funded with after-tax dollars, meaning distributions in retirement are not subject to income tax. This structure is beneficial when inflation pushes individuals into higher tax brackets over time. HSAs, which offer triple tax benefits—tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses—serve as another effective tool for preserving wealth.

Indexing capital gains taxes to inflation has been debated but is not currently implemented in the U.S. As a result, long-term investors must account for the impact of inflation on taxable gains. Holding investments for over a year qualifies them for lower long-term capital gains rates (0%, 15%, or 20%, depending on income), reducing the tax burden compared to short-term gains taxed as ordinary income. Municipal bonds, which provide tax-free interest income at the federal level and sometimes at the state level, offer another way to generate inflation-protected returns without additional tax liabilities.