How to Protect Purchasing Power Explained

Covering everyday expenses has become more challenging. Between rising prices, changing interest rates, and unpredictable economic conditions, managing your finances is an uphill battle.

This feeling has a name: it’s your purchasing power shifting. Understanding this dynamic will guide smarter choices and strengthen your family’s financial standing. So, what drives your purchasing power? Keep reading to explore the purchasing power definition, the factors that impact it, and how to protect yours.

What is Purchasing Power?

Purchasing power refers to the value of your money. It measures how many goods and services you can purchase at today’s prices.

For example, a family spending $400 per month on groceries ten years ago may need $550 or more to buy the exact same items today. Their spending did not change—the prices did. The gap between what your money used to buy and what it buys now is purchasing power at work.

Purchasing power increases when your income or savings grow faster than prices do. Meanwhile, it decreases when prices rise faster than your earnings. It is also known as “spending power” or “buying power.”

The number in your bank account is only part of the picture. What that number does for your family—now and in the future—is what purchasing power actually measures.

What Causes Purchasing Power to Change?

There are many factors that affect purchasing power. Some are outside your control, while others depend on the financial choices you make. Knowing the difference will provide helpful context. Here are the main drivers that impact purchasing power:

• Inflation: This is a well-known factor. When the overall price of goods and services rises over time, each dollar you spend covers less ground than it did previously.
• Interest Rates: Your savings and deposits can earn more when rates are high, helping your money grow. However, higher rates may also increase the borrowing costs for loans and mortgages.
• Income: If your paycheck grows alongside rising prices, your purchasing power holds steady. Meanwhile, if it lags behind, your everyday expenses will start to feel tighter—even when nothing in your budget has changed.
• Taxes: The more you pay in taxes, the less money you have to spend, save, or invest.
• Supply and Demand: When items are scarce and demand is high, prices rise.
• The Broader Economy: A healthy economy results in job stability, wage growth, and more financial opportunities. Economic downturns tend to have the opposite effect.

For a deeper dive into each purchasing power trend, review our previous article.

How to Increase Purchasing Power

You can’t rewrite economic policy, but you CAN make choices today that give your money a better chance of holding value. The strategies that make the biggest difference include:

1. Earning More Interest on Your Savings

Due to inflation, money that isn’t growing is basically shrinking. Specifically, keeping $10,000 in a non-interest-bearing account today will have less buying power next year—even if your balance stays exactly the same.

The remedy is moving your savings to somewhere it can earn. A certificate of deposit locks in a guaranteed rate for a set period. Money market accounts offer high yields with more flexibility. Interest-earning checking accounts let your everyday funds generate some return.

The difference between 0.04% APY (annual percentage yield) and 4.00% APY on a $10,000 balance is nearly $400 in a year. That is real money. Over multiple years, the compounding effect makes this gap EVEN LARGER.

HELPFUL RESOURCE: Crunch some numbers with a Compound Interest Savings Calculator and a Tax & Inflation Calculator to learn how your purchasing power is growing or declining.

2. Using Tax-Advantaged Accounts to Protect Your Money

Most people focus on earning more money, but fewer think about keeping more of what they already earn. Your tax situation has a major impact on purchasing power. Every dollar that goes to taxes is a dollar that can’t be saved, invested, or spent on your family.

Tax-advantaged accounts—such as the Thrift Savings Plan (TSP), traditional IRA, Roth IRA, Health Savings Account (HSA)—are specifically designed to reduce your overall tax burden. That could mean deducting contributions today, letting your savings grow without annual tax drag, or withdrawing funds during retirement tax-free. No matter what, these accounts help you keep more of your money than a standard savings account.

What specific accounts make the most sense? It depends on your income level, how close you are to retirement, your military status, and whether your taxes will be higher or lower in the future. A financial professional can help you think through the right mix, but the core principle is simple: any dollar that avoids unnecessary taxation has more purchasing power.

HELPFUL RESOURCE: CD IRAs and money market IRAs are worth considering if you want savings that earn interest and also carry retirement tax benefits. Plus, use Traditional IRA Calculator, Roth IRA Calculator, or HSA Calculator to see how your contributions impact your taxes and growth.

3. Growing Your Money Through Investing

Interest-bearing checking accounts and savings accounts are a great starting point, but they might not be enough to beat inflation. Knowing where to invest money—whether through stocks, bonds, or mutual funds—can give your money a better chance of growing faster than rising prices. There is some risk involved, however.

If the idea of investing is overwhelming, you can start small with a straightforward approach. For example, a plan with employer match represents an immediate return on your contribution that no savings account can replicate.

Remember, the goal isn’t quick wins. The goal is to build wealth gradually, so you have enough money to buy what you need in the future!

4. Increasing Your Income

Purchasing power is directly tied to the money you bring in. No savings or investment account can FULLY compensate for income that falls behind inflation year after year. At some point, strengthening your purchasing power means finding ways to earn more money.

That looks different for every family. For some, it requires asking for a raise by presenting accomplishments and industry benchmarks. For others, it means adding a certification or skill to qualify for better-paying jobs. Many families also bring in additional earnings through a side business, rental income, or part-time work.

5. Paying Off Debt

High-interest debt leaves less money available for groceries, family activities, and future goals. When a big slice of each paycheck goes toward interest payments, it becomes harder to save money or cover unexpected costs without stress.

Tackling debt means planning to pay down credit cards and other high-interest balances as quickly as possible. It also means avoiding new debt unless it truly serves you (e.g., loan refinance or debt consolidation loan). As your monthly payments shrink, you can redirect your cash toward building an emergency fund, saving for education, or investing in long-term goals.

HELPFUL RESOURCE: Compare different repayment strategies like the snowball method, avalanche method, and debt consolidation. And if you own a home, learn how to settle credit card debt faster with a cash-out refinance.

6. Smarter Budgeting with BAH and BAS

A budget alone may not raise your income or outpace inflation, but it is still one of the best ways to protect the money you already have. When you clearly track where your money goes, it is easier to see how each dollar is working for you. In the military community, that includes regular income as well as tax-free benefits like Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS).

Treating BAH and BAS as their own lines in your budget—not “extra” money—gives every dollar a job and can make a big difference. For example, aim to spend slightly less than your BAH on housing; then, set aside the leftover amount for savings, investments, or debt payoff. As a result, your finances will be better positioned to withstand inflation and rising costs!

A clear budget also reveals trends you might miss otherwise, like unused subscriptions, wasteful spending, or easy places to save more. Keeping a simple monthly budget that tracks income, BAH, BAS, and broad expense categories can help you maximize your money and protect purchasing power.

HELPFUL RESOURCE: Get better visibility with budgeting tools like My Finance360. Armed Forces Bank clients can set savings goals, manage debt, define spending limits, and link bank accounts for a complete view of their finances.

7. Using Home Equity to Improve Your Financial Position

For most families, their home is the largest asset they will EVER own. And while it is primarily a place to live, it also accumulates equity over time. That home equity represents real financial flexibility when used thoughtfully.

As your home’s current market value increases and remaining mortgage balance decreases, you build equity in your home. More equity creates greater financial opportunities, giving you access to funds at lower interest rates than other borrowing options. That can mean:

• Lower monthly payments when consolidating debt
• Access to capital for home improvements that raise the property’s value
• A refinance that reduces your rate and frees up monthly cash flow

Remember, home equity isn’t a revolving door, it’s a long-term asset. Tapping it for the right purpose at the right time—will positively impact your financial position. Treating it casually can do the opposite!

8. Leveraging the GI Bill for Education

The Post‑9/11 GI Bill helps protect future purchasing power by cutting or eliminating education costs that could otherwise lead to heavy student loan payments. Using benefits for your own education—or transferring them to a spouse or dependent—can greatly reduce how much your family needs to borrow.

Think of the GI Bill as a dual benefit. It reduces financial strain today while increasing future earning potential. That way, you can avoid large loan payments and leave more room to cover housing, savings, and day-to-day expenses.

9. Using Military Discounts to Lower Everyday Costs

Military discounts can do more than reduce costs of occasional meals out; they can directly protect your purchasing power by lowering your regular cost of living. When you use discounts on essentials like groceries, phone plans, insurance, travel, and retail, then less of your paycheck goes toward basic expenses.

To really benefit, treat military discounts as part of your financial strategy, not a “nice surprise at checkout." Try to maintain a list of go‑to retailers, services, and subscription providers that offer verified military pricing, and ALWAYS ask if a discount is available before you pay.

Get More Purchasing Power at Armed Forces Bank

Financial stability means something different to military families who move frequently, navigate deployments, and handle constant changes in income and routine. While simply understanding how purchasing power works is a strong first step, you need the right financial tools to turn your knowledge into action:

• Money Market Account¹ — Grow your savings at high money market interest rates while maintaining easy access to funds.
• Certificate of Deposit² — Choose a fixed CD rate for a set period to grow your savings and protect your money from inflation.
• High-Yield Checking Account³ — Earn interest on your everyday balance so your checking account works harder for you.
• HELOC⁴ — A flexible line of credit tied to the equity in your home, available to access when needed.
• CD & Money Market IRA^5,6 — Grow your retirement savings at competitive rates while keeping the tax advantages of an IRA.
• Personal Loan/Military Loan⁷ — Combine multiple high-interest balances into one fixed-rate loan to simplify and lower monthly payments.
• Cash-Out Refinance⁸ — Also available as a VA Cash-Out Refinance, turn home equity into cash with a new mortgage loan, leaving more room for other financial priorities.
• Financial Calculators — See how your savings, retirement contributions, and credit card/loan payments impact your finances over time.
• My Finance360 — Monitor spending, set goals, tackle debt, and view all linked accounts in a single dashboard.

Your purchasing power is worth protecting! Armed Forces Bank is here to help your family make the most of every dollar.

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FAQ: How Purchasing Power Works

How do you calculate purchasing power?

First, you need to find the Consumer Price Index (CPI) on the U.S. Bureau of Labor Statistic (BLS) website. The CPI is a number that shows how the overall cost of everyday goods and services changes. When CPI goes up, prices are higher than before.

If you want to learn how much a past dollar amount is worth today, you need to calculate the inflation-adjusted amount. Use the formula:

Inflation-Adjusted Amount = Amount x (Current CPI ÷ Previous CPI)

If you want to learn how much the value of your money has changed, you need to calculate purchasing power. Use the formula:

Purchasing Power Ratio = Current CPI ÷ Previous CPI

How do interest rates impact purchasing power?

Interest rates influence both borrowing costs and savings returns. Higher interest rates can reduce purchasing power by making loans more expensive, but they can also increase purchasing power for individuals by growing their savings. Lower interest rates do the opposite.

How can I protect my purchasing power from inflation?

The common ways people protect their purchasing power include:

• Earning higher returns on savings or investments
• Reducing high-interest debt
• Using accounts or tools that help offset rising costs
• Preparing your long-term goals to withstand inflation

 

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