Inflation has remained low for nearly 40 years. Tame, on the other hand, does not imply toothlessness. Here’s what I’m talking about: Rising prices or inflation would have destroyed around 60% of my purchasing power over the years if I had buried a million dollars in a suitcase when I graduated from West Point in 1988. I didn’t have a briefcase or a million bucks, in case you were asking, but let me get back on track. This form of erosion took place during a period of low inflation.
Here are some crucial points to keep in mind as you try to protect your finances against inflation:
- Understand the difference between your own inflation rate and the CPI. The Consumer Price Index, or CPI, is commonly used to measure inflation. The Consumer Price Index (CPI) tracks the average change in the prices we pay for products and services over time. Keep in mind that, despite the complexity of the computation, it represents a weighted average of expenses. Because your lifestyle, spending and saving patterns are unique, this is not the same as your own inflation rate. Consider using an internet calculator to establish your personal inflation rate as a starting point for your inflation-proofing activities.
- Make sure your portfolio includes inflation-friendly investments. Think about the following possibilities:
- Stocks. Investing in equities of all kinds has long been a way to beat inflation. The track record is self-evident. Over the previous 100 years, large U.S. equities have outperformed inflation by about 7% every year. If you dig a bit deeper, you might find equities that do well in an inflationary climate. Food, health care, energy, and building materials stocks have traditionally performed well. Broad-based indices, on the other hand, are likely to make this technique easier, less expensive, and more manageable.
- Securities issued by the Treasury that are inflation-protected. TIPS are designed to keep up with inflation and are issued by the US government. In practice, the price of these bonds rises in lockstep with inflation, ensuring that they maintain their purchasing value. In an inflationary climate, the value to which the fixed interest rate is applied would increase, even while the fixed interest rate remains constant over the life of the bond. They are available for purchase directly from the United States Treasury Department at treasurydirect.gov. The bond’s principal amount is guaranteed by the US government at maturity. Because the inflation adjustments to the bond’s principal amount are taxable income, you can avoid “phantom income” by putting them in a retirement account.
- Series I Savings Bonds aren’t like your grandmother’s savings bonds. They have a return based on a combination of a fixed rate that keeps the same for the duration of the bond’s 30-year tenure and a twice-yearly inflation rate. Unfortunately, there is a $10,000 annual purchase limit, but they can be a good way to combat inflation in your portfolio.
- Commodities and real-estate investments are two types of investments. As prices rise, you should expect to see price increases in all kinds of raw materials, precious metals, and, yes, real estate. If you have a fixed-rate loan on your rental, the principle and interest component of your monthly expense is fixed. In addition, rental income may increase.
- Expect greater interest rates in the future. In the past, higher interest rates have been associated with increased inflation. Do you recall the double-digit interest-rate CDs from the 1980s? Consider refinancing to lock in historically low mortgage rates and focusing on paying off variable-rate obligations like credit cards before rates spike.
- Examine and re-evaluate your loan. You could be tempted to ride out your mortgage if you’ve already taken advantage of low interest rates, especially since your principal and interest component of the payment won’t grow. A mortgage, on the other hand, is likely to be your largest expense, and when it comes to cash-flow commitments, less is more.
- Keep an eye on your short-term cash equivalents. The difference between money market funds and regular savings accounts didn’t seem to exist that long ago. If inflation persists and rates climb, this might happen again. Keep an eye on what’s going on so you don’t end up with cash equivalents who aren’t working as hard as they could.
- The bond teeter-totter should be avoided. Because bond prices fall as interest rates rise, longer-term fixed-rate bond investments may be particularly vulnerable unless you plan to keep them until maturity. Fixed-income assets with a changing or adjustable rate, on the other hand, may perform better.
- Continue to work hard. This may not be a pleasant message, but it is something to think about. Inflation has an impact on wage levels. Continuing to work can assist you resist rising prices as long as your income rises in tandem with inflation.
I don’t have a crystal ball, but I believe we all need a flexible game plan, which includes honing our inflation-fighting skills.
How does one combat inflation through personal finance?
With prices on the increase, it’s worth revisiting some of Buffett’s finest advice for dealing with what he famously called a “gigantic corporate tapeworm.”
Invest in good businesses with low capital needs
Buffett has long pushed for holding firms that generate significant returns on invested capital. During inflationary periods, businesses with minimal capital requirements that can sustain their profitability should perform better than those that must invest more money at ever-increasing prices merely to stay afloat.
Inflation, according to Warren Buffett, is like “going up a down escalator.”
Look for companies that can raise prices during periods of higher inflation
Buffett told the Financial Crisis Inquiry Commission in 2010 that “pricing power is the single most critical factor in appraising a business.” “You have the ability to raise prices without losing business to a competition, and your business is quite good.”
During periods of high inflation, a business that can raise its pricing has a significant advantage since it can offset its own rising costs.
Buffett famously argued that in an inflationary society, an unregulated toll bridge would be the best asset to possess since you would already have built the bridge and could raise prices to balance inflation. “If you build the bridge in old dollars, you won’t have to replace it as often,” he explained.
How do you handle your finances when there is inflation?
As a result, we sought advice from experts on how consumers should approach investing and saving during this period of rising inflation.
Invest wisely in your company’s retirement plan as well as a brokerage account.
How can you safeguard against hyperinflation?
Don’t forget about the most important investment: yourself, as effective as many other investments are during inflation.
Your ability to earn money, regardless of the amount, remains your most valuable asset. You must continue to earn a paycheck during bull and down markets, periods of volatility or calm. The more value you provide to employers or clients, the better your finances will be protected from shocks such as hyperinflation.
Maintain your education, certifications, licenses, and professional credentials by continuing your education. Make time for networking. Set yourself up for success in the good times so that you can weather the storm in the bad.
Remember that investments are simply one component of the inflation equation. You should also think about making lifestyle changes to shield yourself from inflation. Your savings rate determines how much money you accumulate. Save more, invest more, diversify your portfolio, and focus on building genuine wealth rather than the trappings of money like flashy homes and cars.
Even if inflation depletes your portfolio, you can retain financial stability by continuing to earn a good, inflation-adjusted income while keeping your costs in check. Make an investment in yourself.
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What investments do well in the face of inflation?
- In the past, tangible assets such as real estate and commodities were seen to be inflation hedges.
- Certain sector stocks, inflation-indexed bonds, and securitized debt are examples of specialty securities that can keep a portfolio’s buying power.
- Direct and indirect investments in inflation-sensitive investments are available in a variety of ways.
What industries benefit from inflation?
Inflationary times tend to favor five sectors, according to Hartford Funds strategist Sean Markowicz: utilities, real estate investment trusts, energy, consumer staples, and healthcare.
What is the average duration of inflation?
NEW YORK (WABC) Inflation is at an all-time high, but this is hopefully the worst of it.
Consumer prices increased 6.8% in the year ended in November, a 39-year high. For a variety of factors, many economists forecast inflation to linger near this level for a few more months before moderateing through 2022. They also don’t expect a replay of the 1970s and early 1980s, when inflation soared beyond 10% for long periods of time.
How do you protect yourself from inflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.
Before hyperinflation, what should I do with my money?
“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
What should I do to prepare for hyperinflation in 2021?
Food and water may become more difficult to obtain in the future, which is difficult to accept when you have hungry mouths to feed. Consider dedicating a piece of your property to gardening and fruit tree planting to assist you and your family stay afloat. Alternatively, if you have the funds, you may need to purchase more land with a water supply on its property.