Inflation may have dropped in recent months, but savers still have a fight on their hands if they wish to avoid its corrosive effects.
We’ll look at how taking certain risks with your money can help you keep your money’s value above inflation.
Shift longer term savings into equities
You might have some money in a savings account. After all, it’s recommended that you save away roughly six months’ worth of earnings as an emergency fund. However, you may discover that you have more than you require. If that’s the case, think about putting some of it into investments that have a better chance of long-term growth.
Equities have historically been the most successful assets for fighting inflation over the long term but you must be comfortable with your investments rising and falling in value.
Choose your investments wisely
Other investments, if you know where to search, can produce returns that are higher than inflation. Bond funds, for example, could be included in a portfolio of investments because they invest in debt issued by governments and/or enterprises seeking to raise financing. Throughout their lives, bonds pay a defined rate of interest, known as the coupon, and should refund the original capital at maturity. To spread risk, bond funds invest in a variety of debt instruments.
A financial adviser can help you create a portfolio that takes advantage of all available investment opportunities.
Maximise tax efficiency
After you’ve figured out how to fight inflation, think about how tax-efficient your assets are. ISAs and pensions are both tax-advantaged vehicles for saving and investing for the long term.
ISAs allow you to save up to 20,000 a year in tax-free growth and income on investments, as well as tax-free withdrawals. Meanwhile, depending on your taxable income, pension payments may be eligible for income tax relief of up to 45 percent.
When you can afford it and while they’re still accessible, it’s a good idea to take advantage of hefty tax breaks over time. This way, you may take advantage of compound growth or earning returns on your returns to help you keep up with inflation.
Seek expert advice
A sound investment strategy should include a diverse portfolio of assets and the use of tax-advantaged investment vehicles.
We can put together a diversified portfolio that is geared to your long-term financial goals, risk tolerance, and inflation protection. Get in contact with us right now to learn more.
How do you avoid losing money because of inflation?
How to Keep Your Money Safe. The most effective approach to avoid inflation is to invest your savings for a higher return than money market or savings accounts can provide. Investing in almost anything else carries a higher risk than an FDIC-insured account.
What do you do with cash in a hyperinflationary environment?
“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 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 is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What is the safest investment?
Cash, Treasury bonds, money market funds, and gold are all examples of safe assets. Risk-free assets, such as sovereign debt instruments issued by governments of industrialized countries, are the safest assets.
How do you protect yourself from hyperinflation?
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.
How do you deal with rising prices?
Is there anything you can do as a consumer to battle inflation, leaving aside investing strategies? In fact, you have a lot of options.
People’s temporal preferences for their money fluctuate as inflation changes. If you predict future inflation to be lower, you are more inclined to postpone gratification by saving and investing your money. In contrast, if you expect inflation to rise, you are likely to spend more money now, perhaps because you are concerned that your money will purchase less in the future. As a result, it may be worthwhile to consider making some common-sense changes to your personal financial planning approach, which might include everything from how you finance your home to what kind of car you buy to how you buy your groceries.
Now, if you believe inflation will not remain high and will fall back to the 1% to 2% level, it is unlikely that you should make any modifications. Assume, however, that you are concerned about price rises remaining above 3% on average and that real (inflation-adjusted) interest rates remaining negative. In that scenario, you may want to revisit some of your financial planning selections, ensuring that they are tailored to your specific financial status and risk tolerance.
Is debt wiped completely by hyperinflation?
For new debtors, hyperinflation makes debt more expensive. As the economy worsens, fewer lenders will be ready to lend money, thus borrowers may expect to pay higher interest rates. If someone takes on debt before hyperinflation occurs, on the other hand, the borrower gains since the currency’s value declines. In theory, repaying a given sum of money should be easier because the borrower can make more for their goods and services.
Is gold a good inflation hedge?
Gold is a proven long-term inflation hedge, but its short-term performance is less impressive. Despite this, our research demonstrates that gold can be an important part of an inflation-hedging portfolio.