Inflation is the increase in the overall price of goods or services in the economy while the overall purchasing power of your currency, in the USA, the dollar, in increases slower than the price of goods. The result of inflation is that it takes more money to buy the same amount of a good or service than it did in the past. So how do you protect yourself from inflation. There are a few strategies that could be helpful.
Invest in Assets, Such as Real Estate
Historically, buying a home is a good investment. That home has the opportunity to grow in value and offsets wasted rent money. When you are a renter, your landlord will likely hike your rent at the level of inflation when your lease comes due each year, which might be fine when inflation is low, but it is much less desirable when inflation is high. Additionally, as a renter, your housing costs are unprotected from inflation. Yet, in contrast, there are two strong reasons to buy a home. First, as a homeowner, your mortgage payments are generally fixed. Second, the replacement value of your home is likely to increase with inflation because the cost of land, materials, and labor are all rising with inflation. Being a homeowner helps to protect you from inflation. Furthermore, encase you were considering it, play the long term game here, we do not recommend the flip game. It is a known fact that real estate investments do not typically generate a return within several months or weeks; they require an extensive waiting period in order for values to increase. Housing prices tend to increase over time, counteracting the effects of inflation.
During a time of high inflation, it is better to finance your home, assuming that you don’t take on more leverage than you can handle, then to pay with all cash. If you get a fixed mortgage that is as long-term as you can stomach, you are making inflation work for you. Some homeowners are borrowing money for 30 years and paying less than 3% per year, and that is before taking into consideration the tax deduction on interest expenses. However, the very best thing about a mortgage is that the inflation-adjusted value of your mortgage payments declines at the same rate as inflation rises.
Invest in Stocks
Some of the best stocks to own during inflation would be in companies that can increase their prices naturally during inflationary periods. Commodity resource companies are one example. Products like oil, grains, and metals enjoy pricing power during periods of inflation. The prices of these items tend to go up as opposed to, for example, the price of a computer, which is subject to manufacturer and distributor price adjustments.
Look to invest in businesses such as commodity firms or healthcare companies that possess the strongest profit margins and, generally, the lowest cost of production. Furthermore, never underestimate the value of dividends during periods of inflation. Dividends increase the total return of a portfolio.
Invest in Yourself
By far the best investment you can make to be prepared for an uncertain financial future is an investment in yourself. One that will increase your future earning power.
This investment begins with quality education. This strategy continues with keeping your skills up-to-date and learning new skills that will match those most needed in the not-too-distant future. Being able to stay on top of a business’s changing needs may not only help to inflation-proof your salary, but also recession-proof your career.
Prepare For Shortages
Shortages are quite common in high inflation environments. For that reason, you may want to consider creating and maintaining an emergency supply. The supply should be of non-perishable food and other essentials for periods when stores cannot resupply themselves. Fortunately, with prices rising quickly, buying emergency supplies can represent a high interest rate savings vehicle: the likelihood is that the prices of goods will increase at a much faster rate than the interest rate on your checking account.
Follow A Budget
Put together a budget and focus especially on the expense categories that inflation might affect in the future such as transportation, food, utilities, education, and healthcare. Think about ways to stretch your budget further, such as shopping at less expensive stores or bulk stores like Costco. Also, consider expenses that you can cut or reduce without affecting your quality of life. You can’t control how inflation rises and falls, but you can control your own financial decisions and make choices today that will help you manage inflation tomorrow.
Disclosure: This article is for informational purposes only and is not a recommendation of a particular strategy. Talk to a financial advisor about what is the best options for you and your family.
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