Inflation can be a scary thing. It’s hard to know what will happen in the future, and inflation is often unpredictable. Imagine if your purchasing power were diminished by 50% in one year.
There are many ways that you can protect your money against it, whether by investing it wisely or planning for the rise in inflation with inflation-resistant assets that will be a hedge against inflation.
Many people believe that inflation is inevitable, especially in countries where the currency has lost so much value due to increasing the money supply or “money printing.”
Investing can be a stressful concept in an inflationary environment since inflationary periods can cause your investment strategy to change rapidly. Having too much cash over long periods can be detrimental as well as investing in high “growth potential” options.
Which asset class should you invest in?
In this blog post, we’ll explore 15 different ways you can help protect your money from inflation so it doesn’t eat away at your savings and you can make intelligent decisions to outpace inflation.
How Does Inflation Affect Money?
Inflation affects money by decreasing its buying power. If inflation is at a rate of five percent per year, then your money will be able to buy 95% of what it could last year with that amount of money.
For example, if you were to spend $100 on something today and inflation was at five percent for the next twelve months, next year that same $100 would only buy goods priced at $95 because inflation caused prices to increase by five percent during this time period.
This means that even though your salary may not have changed since last year (as inflation rates are usually expressed as annualized), more than likely it won’t stretch as far in terms of purchasing items like food or clothes since those consumer prices have risen due to inflation. This higher inflation hurts millions of people in the middle class and those with a fixed income.
Why Inflation Is Called the “Worst Tax”
Higher inflation is called the “worst tax” because it not only affects your buying power but also the return on your investments.
Imagine inflation is at five percent per year and you’re able to put $100 in a savings account that pays interest of three percent annually (a pretty good rate). After one year, you’ll have earned one hundred dollars via interest.
However, inflation will cause prices for goods to increase by five percent so if inflation were still at five percent after this time period, then it would cost you $105 next year to buy what costs $100 today due to inflation eroding your money’s value over time as it will push prices higher.
If inflation was to remain at five percent for a long period, your money would become completely useless since it wouldn’t be able to buy anything due to rising prices and the purchasing power not increasing relative to inflation.
What Happens When Inflation Rates Are Negative?
While inflation rates are usually positive (meaning they’re above zero), there can also be times when inflation is negative or below zero. This is called deflation.
This means that the general price level falls rather than rises over time which has its own set of issues such as lower economic growth and higher unemployment.
However, if the inflation rate were extremely low – close to zero – then it could actually benefit people by allowing them more purchasing power with their dollars even though prices are low.
Why Is It Important to Protect Your Money Against Inflation?
If inflation is high, then it’s important that you’re able to maintain the same purchasing power for your salary and also be able to invest enough of it so inflation doesn’t eat away at any earnings from interest on these investments.
Inflation rates are usually expressed as annualized percentages which means that they measure how much prices have increased or decreased over a one-year period.
Since inflation impacts our economy by impacting people’s lives, many central banks around the world try their best to avoid high inflation levels in order to avoid economic problems such as recessions.
If inflation is too high, this causes other issues like stagflation where unemployment increases along with price levels which makes inflation much harder to control.
This can cause serious problems for people since inflation rates are usually only expressed in annualized percentages which means that inflation may outpace your salary growth several times over a long period of time (meaning more of your money will be eaten up by inflation than earned through increases in earnings). Taking this into account with your full personal finance picture is important.
If inflation is 5% for the year and you didn’t receive a raise last year at your job. You have less power to buy things today than you did last year. This is why buying inflation-protected assets is so important.
1. Gold and Other Tangible Assets
One of the most popular inflation-proof asset classes to invest is in tangible assets like gold and silver. These metals cannot be printed by a government, they don’t rot over time, and they retain their value much more easily than other investments which can quickly lose their worth with inflation.
Gold is a good hedge against inflation. If inflation occurs, the value of gold will rise because people want to trade their devalued cash for something that won’t lose its worth like metal coins with intrinsic value. An asset class that cannot be created by government decree is usually a good hedge against rising inflation.
2. Commodities
Another inflation hedge investment as inflation rises is in commodities. Commodities are essentially raw materials that have future value, so they will often rise when inflation occurs because the cost of production increases while simultaneously decreasing their supply.
Commodities include oil and gas for fuel, food like corn or soybeans to feed livestock, metals like copper or aluminum used by manufacturers to create other products, gold, and silver as discussed above, and wood pulp for paper making which has many uses across lots of industries, cotton fiber/linen fabric used by clothing makers, etc.
Most tangible things are used to power our health care systems, build real estate, and anything we eat as commodities. The investment returns on commodities can be substantial especially if prices tend to be rising and the overall counter-wide or global financial situation worsens.
3. 60/40 Stock/Bond Portfolio
60/40 is a well-known investment mix that includes 60% stocks and 40% bonds. It reduces inflation risk by including both inflation hedging assets like precious metals, commodities etc. as well as treasury bonds which are often inflation-protected themselves.
This type of portfolio can be very low maintenance when an investor chooses to buy index funds instead of only investing in mutual funds because they will automatically track the market average for them without having to actively trade daily or weekly depending on whether you choose individual indexes or ETFs (exchange-traded funds).
4. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are a type of security that holds investments in real estate property. They can be publicly traded on stock exchanges and will often pay dividends as well as offer inflation-protected rental income from tenants who have to continue paying rent even if inflation occurs because it’s the cost of doing business for them.
REITs do come with some risks though– what happens if there’s a natural disaster like an earthquake or hurricane which damages properties held by these REITs? Even the most prudent in risk tolerance cannot predict the forces of nature let alone external market forces.
This is why investors should diversify their portfolio with different asset classes too so they don’t lose everything when something unfortunate does occur, but also partially because you want different types of assets to protect against inflation since one alone can be extremely volatile over a decade or longer period of time. Best to know your risk tolerance and act accordingly.
5. S&P 500 ETF
An inflation-proof way to invest in stocks is through an S&P 500 ETF. The S&P 500 index consists of the biggest, most liquid companies on the American stock exchange and this type of fund will track their performance so you can expect inflation protection as long as they exist.
This includes inflation hedging assets like commodities since many large manufacturing firms are included in this index too along with other types of businesses which also see inflation increase costs over time.
The only drawback to investing in a general market ETF or mutual fund instead of individual stocks that hold REITs for example is diversification– what happens if all those stocks go down together? How much money will be lost if that happens?
6. Real Estate Income Through Renting Out A Home
Investing in a home to rent it out is inflation-protected because inflation will cause the cost of new construction and materials used by contractors to rise. We’ve definitely seen this before with property values.
Homeowners can reduce expenses by renting out their homes and put that extra money into something that can be a hedge against inflation. This side hustle and real estate, in general, is something I’ve been doing for years and is important to a diversified portfolio.
This allows rental income to be invested in inflation hedging assets like precious metals.
7. Leveraged Loans
A leveraged loan is a type of asset-backed security that’s inflation-proof. These are typically used for commercial real estate investments and the interest rates will adjust according to inflation and is better than a fixed rate of interest.
This loan is typically given to a company that has significant debt already so be sure your investments are not heavily weighted in this category.
8. Treasury Inflation-Protected Securities (TIPS)
An inflation-proof investment for those who want to invest in long-term inflation hedges instead of short-term ones is investing in treasury securities. These are bonds issued by the US treasury and will adjust their interest rates according to high inflation so you can be sure that inflation doesn’t eat away at your return on investment over time like it does with normal paper currency or savings accounts which earn little extra money over time because inflation takes its toll even if all other factors remain constant.
TIPS work best for people looking to hedge against inflation.
9. Stocks
Stocks are inflation-proof because high inflation will cause the price of goods to increase which means companies can charge more for their products.
However, this is only true if the company in question manufactures or provides a service that people still need when they are in an inflationary environment.
Putting too many resources into any single stock could be very risky but at least you’ll lose out on some returns during times of deflation since inflation-proof assets tend to rise faster than investments that don’t protect against inflation as stocks do.
10. Cryptocurrency
The inflation-proof nature of cryptocurrency works in the same way as stocks– inflation will cause prices to increase so companies can charge more for their goods which means people are willing to pay.
However, since cryptocurrencies are fairly new and not backed by anything at this point it’s better if they make up a small portion of your portfolio instead of trying to go all in with one coin unless you have enough money lying around where losing some won’t hurt too much.
A lot of corporate investment portfolios have started to include crypto because let’s face it, inflation matters.
Personally, I have a small bit of Bitcoin and Ethereum.
11. Short Term Bonds
Short-term inflation hedges like short-term bonds will adjust according to inflation so investors won’t lose out on money over time due to inflation eroding their savings.
The downside is that they don’t protect you against deflation which means if all other factors remain constant, your investment may not grow as quickly or at all even if inflation occurs since it’s too small of an amount invested for the contract terms.
Also, in the short term, you’ll want to make sure you have a fully-funded emergency fund even during inflationary periods.
12. High Yield Bonds
These are inflation hedges that adjust according to inflation through the same mechanism as short-term bonds. However, they’re riskier because you have to invest more money for a longer period of time.
13. International Bonds
The bond market and international bonds will adjust according to inflation which means inflation won’t eat away at your return on investment over time.
However, there is no deflation protection so you risk losing out completely if market factors drop faster than inflation does or all other factors remain constant and inflation occurs but doesn’t rise as high-interest rates rise on the bond. This can cause bond prices to fluctuate. This is why it’s best to keep different asset classes in your retirement accounts.
14. Review Debt Balances
I recommend not having any unsecured debt. Unsecured debt such as a credit card can really put you behind financially especially if you have a fixed income.
Secured debt, like that of an investment property, can be an effective inflation hedge. The inflation protection you can receive by owning real estate is great even on a fixed income.
If you have a 30-year fixed mortgage and the consumer price index (inflation) is increasing you will be making the same payment each month on less expensive debt. That’s a win-win because a dollar today is worth a lot less than a dollar 30 years from now. This is one of those financial instruments that most people know about but not why it’s important.
15. Equities
Inflation hedges like equities will adjust according to inflation so investors won’t lose out on money over time due to inflation eroding their savings.
The catch is that they don’t protect you against deflation which means if all other factors remain constant, your investment may not grow as quickly or at all even if inflation occurs since it’s too small of an amount invested for the contract terms and what happens when there are no dividends being paid out because companies are just struggling financially instead?
Conclusion
There are all ways that can protect you against inflation.
Even though there is no way to avoid inflation completely, having a diverse investment portfolio of hard and soft assets helps hedge against different types of risks while also protecting against inflation.
You don’t want to be relying on a meager social security benefit when your money is losing value each and every year.
Investing in these assets will help you beat inflation and be in a better position financially.
This article originally appeared on MaxMyMoney.org and was syndicated by MediaFeed.org.
More from MediaFeed:
6 ways to protect your money from inflation
Inflation has been squeezing — and infuriating — U.S. consumers for a long time now.
What began as an annoyance (an extra pinch at the gas pump and the grocery store) has turned into a painful reminder that budgeting and saving may be even more important than anyone ever thought. And without a plan to deal with inflation’s effects — day to day and over time — your dollars can lose purchasing power.
The good news is that it’s never too late to consider strategies that could protect your money from inflation, while also keeping in mind your personal financial situation, your goals, and your tolerance for risk.
Read on for intel on how to protect your money and yourself from inflation.
Related: What is wealth management?
nicoletaionescu / iStock
Wondering what inflation is exactly? In basic terms, inflation means prices are rising and your purchasing power is declining. You can’t get the goods and services you’re used to buying without paying more for them. And if your income doesn’t increase to match those higher prices — because you can’t get a pay raise that keeps up, or you’re a retiree on a fixed income — it can really impact your lifestyle.
The U.S. has been on a months-long run of record-setting inflation since the start of the coronavirus pandemic. And according to the U.S. Department of Labor Statistics, it’s the costs most people can’t avoid — like food, gas, and rent — that are driving the continued increase in the Consumer Price Index (the most commonly used measure of inflation).
It’s true that there are common causes of inflation and escalating prices aren’t uncommon, but what is happening right now is undoubtedly intense. Rates are hitting the highest numbers the U.S. has seen since the early 1980s, which means it’s the first time many consumers here have experienced inflation at this level.
But even a low inflation rate can erode purchasing power over the long haul. For example, according to the U.S. Inflation Calculator, if you purchased an item for $100 in 2000, that same item would have cost $150.30 in 2020 — before inflation soared. The dollar had an average inflation rate of 2.06% per year in the two decades between 2000 and 2020, producing a cumulative price increase of a whopping 50.30%.
That’s why preparing for inflation can be an important consideration for every consumer, whether you consider yourself a saver, a spender, an investor, or (like most people) you’re a mix of all three.
Recommended: Is Inflation a Good or Bad Thing for Consumers?
Yingko/istock
Needless to say, stuffing your money into a mattress or cookie jar probably isn’t the best strategy for protecting your hard-earned dollars.
Not only is an FDIC-insured savings account generally considered a safer place to keep your funds, but you also can earn interest on your money until you need it. Perhaps you’re saving for a down payment on a car or home, a wedding or vacation, or maybe for an unexpected expense.
Although most savings accounts pay minimal interest — usually not enough to counteract even low inflation rates — you’re at least earning something. And if you take time to occasionally review the interest rates various financial institutions are offering, you may be able to improve on what you’re currently getting.
For example, online financial institutions are more likely to offer high-yield savings accounts than traditional brick-and-mortar banks. So, if you’re comfortable with the idea of electronic banking, you may find a significantly higher annual percentage yield (APY). You also might be able to reduce or eliminate some of the fees you’re paying, which can boost your savings as well.
If the Federal Reserve continues to raise its benchmark interest rate in an effort to combat inflation, as it has indicated it will, you may see the rate on your current savings account slowly increase. But if it doesn’t, or if you don’t want to wait around for that to happen, it may make sense to start shopping for a smarter way to save right now.
Photodjo / iStock
Taking the time to reassess the potential earnings from your savings account can be an important step in offsetting inflation’s impact on your bottom line.
But there are other strategies you also may want to consider. Here are steps that can help you protect yourself from inflation.
Love portrait and love the world / iStock
It might be hard to believe when the housing market is this hot and prices are this high, but homeownership actually may help protect you from inflation.
If you’re a renter, you’re probably at the mercy of your landlord when it comes to how much your monthly payment could go up when it’s time to renew your lease. And during an inflationary period, your landlord may decide to raise your rent to reflect higher prices. If you decide to move, your new lease also could reflect the high inflation rate. Plus, you’ll have to go through the hassle of finding a new place and moving.
If you buy a house, on the other hand, you’re more likely to have a fixed monthly payment that’s locked in for the life of your mortgage. Another benefit: The value of the home you own may increase along with inflation. And if you hang onto your home until it’s paid off, you won’t have to worry about what housing prices (renting or owning) might look like in the future.
DepositPhotos.com
Especially if you’re a first-time homebuyer, you might feel more than a little overwhelmed thinking about signing off on a 30-year fixed-rate mortgage for, let’s say, $350,000.
It might help to take a deep breath and think about this: According to the U.S. Inflation Calculator, $350,000 in today’s dollars is equal to about $173,000 in 1992 dollars. Thirty years ago, somebody thought $173,000 was a crazy-high amount of money for a house. Now, it sounds like a bargain. It often takes us by surprise how prices (and salaries) do rise over the years.
If you’re borrowing money for 30 years (the most common mortgage term) at a competitive interest rate — and you aren’t paying more than the home’s appraised value — inflation could work for you. That’s because the value of money, including debt, declines as the inflation rate rises. So, the inflation-adjusted value of your mortgage payments goes down as inflation and your property value go up.
depositphotos.com
If you have the room and a knack for bargain-hunting, it may make sense to build up a supply of the kinds of goods that could be affected by inflationary prices. This is especially those items that are often linked to shortages.
Unfortunately, it isn’t really feasible for most folks to stockpile gasoline. But your backup supply might include canned goods, baby food, paper towels, toilet paper, and other necessities that you find on sale or can buy for less in bulk.
Keep in mind, though, that if you pay for those goods with a high-interest credit card and you don’t pay off the balance each month, you might not see any savings. (Which is another good reason to keep some money stashed in your checking and savings account to pay for such purchases.)
Valeriy_G/istockphoto
The price of durable goods (products that typically last at least three years) also can be affected by shortages and increased consumer demand.
If you need a new car, for example, and prices seem high for the make or model you want, it may be tempting to purchase a lower-quality replacement. Keep in mind, though, that over the long term, you could end up spending more on repairs than you would have if you bought the better brand. Or the less expensive make may not last as long as a better car would have.
You may find it’s a smarter strategy to get an auto loan and invest in the higher-priced car from the start.
martin-dm
A household budget can be a helpful tool any time, but it could be particularly useful when prices are soaring.
Even if you already have a budget, you may want to reevaluate your spending in categories that are or could be vulnerable to inflation, such as food, transportation, healthcare, and utilities. And you may have to look for categories you can spend less on (at least temporarily), such as entertainment, dining out, clothing, and vacations.
If you’ve put most of your bills on autopay, you also can check for “expense creep” on things like cable and Wi-Fi, subscription services, and utilities.
Sticking to a budget could help you avoid touching your emergency savings when times are tight—or, worse, overusing high-interest credit cards.
Once you’ve established a savings account (hopefully a high-interest one) for your emergency fund and other short-term expenses, you may want to look at investing as another strategy to combat inflation.
Though it carries more risk than keeping your money in a high-yield savings account, investing in stocks, mutual funds, or exchange-traded funds (ETFs) can help you grow your money for the future.
Once again, let’s go back 30 years to get some perspective. According to Officialdata.org’s S&P 500 data calculator, if you had invested $100 in the S&P 500 at the beginning of 1992, you’d come out with about $1,974.20 at the end of 2022 (assuming you reinvested all dividends). That’s a return on investment of 1,874.20%, or 10.42% per year. Even after adjusting for inflation, you’d be looking at a 7.87% return per year — which is better than most alternatives. Which all goes to say that investing may be a very good hedge against inflation.
nortonrsx
What is the best way to protect against inflation?
The best approach may be to prepare for the worst while hoping it doesn’t happen. This means finding ways to get the most for your money as a saver (perhaps with a savings account that pays more in interest), spender (adopting a budget and savvy buying tactics), and investor (with investments that keep growing your money over time).
Where should I put my money to combat inflation?
You may want to start by shopping for a savings account that offers a higher APY and/or lower fees. That way, you won’t be slowly losing money as your cash sits in the bank. Another option is to invest it, which is riskier but may yield you a higher return.
How can I prepare for hyperinflation?
You can use many of the same tactics to protect against runaway or hyperinflation as you would for high inflation. You might decide to stockpile goods now, while your money has value, for example. You may choose to buy a car or make another important purchase sooner rather than later. You also can evaluate what expenditures are “needs” vs. “wants” and budget appropriately. Also try not to panic — which can lead to poor decision-making.
RossHelen/ iStock
To younger consumers, today’s high inflation may seem like a new phenomenon. But inflation always has been — and always will be — a challenge.
While you probably can’t avoid inflation completely, with proactive planning, you may be able to blunt its impact on your day-to-day and long-term finances. If you haven’t already, you may want to review your savings, spending, and investing strategies to be sure you’re getting the most you can for your money.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
DepositPhotos.com
Damir Khabirov / iStock
Featured Image Credit: CasPhotography/istock.
