Death and taxes aside, inflation is another reality that we can expect to come across its effects at any one point in our lives. It is a silent thief that cuts the value and worth of our money, making every shilling worth less and less over the years.
Inflation is the continuous drop in the value of money- or, put differently, the continuous rise in the prices of commodities/ properties. Inflation can come about as a result of factors such as; national debt, exchange rates, or increases in the money supply. Governments calculate inflation to determine the pricing of goods and services, particularly household purchases like food, rent, and energy; all while discounting fleeting price spikes.
Going forward, inflation is also a constituent of a healthy economy. An ambivalent, you might say. There’s no joy in buying the same stuff you’ve always bought for a higher price, but this does not offset the fact that inflation is interpreted as a sign of development in a well-doing economy. How?
When inflation is low (deflation), money retains more value leading consumers to get more per shilling. This, in turn, results in a drop in the prices of goods and services. However, this does not always call for commemoration, as low inflation is motive enough for a company or a government to refuse to increase the wages of its workers.
The best way to deal with inflation is to maintain a balance. Central banks should work to avoid deflation, all while making sure that prices don’t rise too rapidly.
Some effects of inflation on the average consumer include;
- An increase in the cost of living. What you spend today to purchase a certain commodity won’t be enough to buy the same product in the future.
- A low rate of inflation stagnates growth even for companies. This means little to no jobs for old and new graduates.
- Credit and loans are most expensive during high inflation. Unless your earnings outpace the inflation rate, you may have a hard time clearing your loan.
- As a saver, you should ensure that your money gets a rate of return equal to or higher than the rate of inflation, otherwise, you risk not having accumulated enough for your retirement. A savings or money market account with attractive interest rates is always a good place to stash your cash. Better yet, invest.
Investors and households alike should understand and implement investing and planning strategies that ensure their assets retain purchasing power at all times. Here are 5 solid approaches to consider as ways of protecting your hard-earned cash from plunder by inflation.
1. Invest in the stock market
The stock market will never seize to work even during an inflation period. Remember that inflation is only bad for customers who have to pay more. Companies, on the other hand, will continue to make their money by selling their products at a higher price. If anything, they may yield a better profit.
You will be more protected when you invest in companies that deal in products that consumers must purchase like household goods, pharmaceuticals, even healthcare products.
2. Invest in hard assets
Have you ever wondered why so many people rush to acquire gold and commodities in the wake of looming inflation? Hard assets including agriculture and property protect against the wealth-eroding outcomes of rising prices. Their minimal correlation to the overall market shields them from inflation-induced economic events that can challenge the market.
One way to go about it is to invest in real assets as a group, generally by investing in sector ETFs.
3. Inflation-protected bonds
Corporate bonds look especially vulnerable to rising inflation. After all, they pay an unchanging rate of income that loses its purchasing power as inflation eats into it. Still, there exist inflation-linked bonds that can provide some cover.
Inflation-protected bonds are special bonds that pay an interest rate as well as adjust their principal value in proportion to inflation. It does not matter whether the inflation is high or low (deflation), as long as you hold your bond until it matures, you’re assured of getting your principal back.
4. Invest in a home
Real estate is a grand investment, inflation or none. The problem comes in when one is torn between trading a home and purchasing a home to live in. Now, any experienced real estate investor shouldn’t have any problems buying and selling houses owing to their ability to detect hidden values in properties. If you’re new to the field, however, you should focus on buying a home with the aim of holding it, even if only for a couple of years. The trick with real estate investments is to give them a substantial amount of time for their values to increase.
When you take out a fixed-rate mortgage, you will pay the same amount of interest regardless of any future increases in rates. This means that your cost of debt will remain to be a lot cheaper than the present-day borrower’s.
Like land, home prices appreciate on an average basis, neutralizing the effects of inflation. Which is better? To hold your money in a savings account and risk it losing its purchasing power by the time you retire? Or invest in real estate which will have the opposite effect?
5. Invest in Yourself
When all’s said and done, the best investment you can make to combat an uncertain future is in yourself. To invest in yourself is to elevate your future earning power.
This begins by getting yourself a quality education and goes on by constantly striving to master new skills that will continue to be in demand even as the years go. The higher you get in the education ladder, the greater your chances of being employed with a commendable pay. This is no mere coincidence. Further studies allow you to not only inflation-proof your earnings but also to recession-proof your career.
Stocks, bonds, and houses are all good investments, but an investment in yourself is the simplest and most efficient way to combat not only inflation but also other forms of economic turmoil.
Because its effects have gone unnoticed by most people, inflation has often been spoken off as the worst tax. By understanding its causes and effects, you can master the expertise needed to protect your holdings from its hidden tentacles.