Author: Metka Volmajer
It is becoming common to see inflation reports in more and more short-term periods. It can be seen that inflation, with its frequent increases, is mostly untamable. As inflation engulfs the economic state of the world, a desire for stable security that everyone wants to achieve is present. To understand the strategies for protecting and growing wealth in times of inflation, it is important to know the effects, on a small and large scale.
How Does Inflation Affect Wealth?
Inflation, in short, is the increase in the prices of services and goods of the economy. It is measured over a certain period. Note that inflation is a natural process in economics and can have assumable short and long-term effects. Short-lived inflation is usually a positive thing, as it decreases the chances of long-term inflation and steadies the business. In contrast, long-term inflation requires protection.
How Does Inflation Affect Your Wealth?
Moreover, when the price of services and goods rises, money loses purchasing power, which in turn decreases its value. If it is worth less, you can buy less. Additionally, inflation concerns various aspects of your investments, like:
● negative real returns, meaning the saved money has less purchasing power,
●stock market differentiation, as the business expenses may rise,
● bond market, due to fixed prices changing,
● real estate, whose value increases.
In general, individuals become at risk for a lower standard of living. Groups with fixed incomes, like retirees, are especially vulnerable as their income sources have trouble adjusting to inflation.
What Can You Do To Protect Your Wealth From Inflation?
1. Stock Investment
Investing in the stock market is, historically, a successful way to fight inflation. Stock investment guarantees ownership of an asset in a growing business. Try to find companies, that offer pricing power and efficient operations, while staying low on debt. Acting according to these fundamentals is one of the wealth protection strategies against inflation.
2. Treasury Inflation-Protected Securities (TIPS)
TIPS is a government-issued bond system designed against inflation. Its main characteristic is that the face value of the owned bond changes with the Consumer Price Index (CPI), a common measurement of inflation. In other words, the value of the investment rises with inflation, meaning the selling price is also higher. It is how you can keep your purchasing power, practicing low-risk investment.
3. I Bonds
I bonds were created by the government, based on a dual interest rate - fixed and variable inflation rate. The fixed rate represents the value at the time of the purchase and is a constant, guaranteeing a base return. Correspondingly, the inflation rate is measured twice a year; a rise in the inflation rate results in an increase in I bonds overall return. The dual-structured system makes your purchasing power adjust to inflation rates while providing stability at a constant rate.
4. Decrease Cash Holdings
Witholding money during inflationatary times can cause you to miss out on investment opportunities. Indeed, most traditional savings accounts are low-interest, whose returns don’t outweight the inflation rate. It prevents the potential growth of your wealth, which can make it hard to keep up the desired lifestyle. Try higher-yield accounts that often offer returns that outpace the inflation rate.
5. Strategical Debt
Fixed-rate mortgage makes monthly debt a constant, even when money loses purchasing power. To make sure the interest rate is lower than during the inflation period, it it best to invest early. Borrowers of low-interest debt avoid higher costs, while benefiting from a stable income. Hard assets, like real estate, can be leveraged as wealth as its value rises during inflation. Further, the mortgage amount remains the same and the burden debt of owner decreases as the asset’s value.
6. International Market
Inflation hit to the domestic economy can be battled with investment to foreign market. Inflation-resiliant countries with advanced systems, like Switzerland and Japan, are prone to protect and grow your wealth during the period of domestic inflation. Opportunities to protect your wealth unlock more and more as you diversify your investment portfolio. Besides, less reliance on the domestic economy can elevate your real returns and give you more control over cash purchasing power.
Inflation - The Learning Path
Inflation is not unexpected, which is why it is important to take precautions sooner that latter. Ignoring inflation, its power, and not tracking its progress, could have short and long-term consequences on your wealth. It is important to stay patient and focus on stategies that will help you in nearby as also in distant future. Inflation doesn’t impact everyone the same - but it will lose its strength if we proactively fight against it.
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