13 Strategies to Deal With Inflation
8 MIN READ
The threat of inflation is a constant worry for many investors. It could pop up at any time and wreak havoc on your portfolio. Inflation also affects the consumer’s cost of living because rising prices can lead to higher interest rates and higher borrowing costs.
Though there is no way to avoid inflation altogether, there are ways to cushion its impact with smart financial decisions so that it doesn’t hurt as much.
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What Is Inflation?
Inflation refers to a general rise in prices for goods and services. It’s a common economic phenomenon that can occur due to various factors, including an increase in supply, demand, or a decrease in currency value.
Difficulties Affecting Inflation
Inflation presents a host of difficulties for investors. These challenges include:
Unemployment and Insufficient Wage Growth
As unemployment remains high, many individuals cannot increase their spending or purchasing power by taking on more work or accepting higher wages. Demand remains stagnant, which hurts prices.
Supply Chain Issues
Inflation causes many businesses to reduce hiring and cut back on inventories. Because small businesses tend to be more agile than large corporations, they might respond quickly to changing economic conditions. However, as inflation affects consumer spending habits, supply chains will struggle amid price hikes.
The Housing Market
Inflation affects disposable income and thus lessens the ability to pay off mortgage payments. Foreclosures then diminish consumer confidence. Due to unpredictable economic periods, buyers are less likely to spend money on the property.
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13 Strategies to Deal With Inflation
Here are thirteen strategies you can use to deal with inflation:
1. Avoid Traditional Bonds
Bonds are fixed-income securities backed by either a government or a corporation.
Unfortunately, bonds have done pretty poorly during times of inflation. They may offer an excellent, steady yield locked in for years, but you could find yourself out of money by retirement after inflation eats into your earnings potential.
2. Invest in Yourself
When everything from food to clothing costs more, investing in yourself will help you cope. Education and acquiring new skills are one of your best bets for fighting inflation. Read up on how different fields grow in demand over time and try to figure out what career path could be right for you.
The more valuable you are as an employee or even as a business owner, the less susceptible you are to the price increases across industries.
3. Invest in Ventures With Low Capital Needs
To combat inflation, many investors turn to investments with high potential returns even though they may be riskier and cost more than other available options.
Because these high-potential ventures require higher levels of initial capital, however, they can be especially burdensome to small businesses that are already feeling pinched. So, in times of rising inflation, look for ventures with low capital needs instead.
Lower capital ventures might not offer as much profit in return for your investment dollars, but as long as you find a way to reduce costs over time, you may wind up being better off in the long run. One example is real estate investments. Real estate is a great hedge against inflation because property values increase as inflation increases.
4. Limit Your Wants
When stores raise prices, go for necessity-based purchases rather than wants like eating out, fancy vacations, or streaming services. Before you go out and buy something new or expensive, ask yourself if you need it. Usually, having a bit of self-control when faced with a problem will solve it entirely.
Focus on what’s important to you and stick to those values. By limiting our wants and focusing on necessities only, we can help offset some of the financial burden caused by inflation.
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5. Shop Smart
Buying when items are on sale at a grocery store can help save money in your monthly budget. It pays off to take a moment and compare prices between different stores. If you’re planning meals for a week or more, check out sales circulars and pick up items on clearance.
If you need to go grocery shopping during regular hours, put together a list of what you need before heading to the store. Making a list ensures that you won’t spend extra time and money wandering around without an idea of what you need.
Another way to cut costs is by buying nonperishable foods in bulk. However, it’s essential to ensure they don’t expire, leading to waste if food spoils before it gets used.
6. Create a Budget and Stick to It
A budget guides your spending and helps you see where your money is going. You can use it to make sure you’re saving enough for retirement, for example, or to make sure you don’t overspend on luxuries.
Even if you aren’t trying to save for anything specific, a budget will help keep track of your spending and ensure that unexpected expenses don’t throw off your finances. When appropriately used, budgets are flexible. If you have extra money at month’s end, you can decide whether to apply it toward debt payments or other savings goals.
To avoid feeling deprived and frustrated by strict budgeting rules, consider making some changes in your lifestyle first and then setting up a realistic monthly budget once those changes have taken hold. You can also seek help from a certified financial planner or financial planning firm if you're having trouble getting started.
7. Earn Interest on Your Cash
Investing in a certificate of deposit (CD) allows you to earn interest on your cash without worrying about losing it due to market fluctuations or inflation. A CD is a low-risk investment that provides a higher interest rate than a traditional savings account.
Banks and credit unions typically issue CDs for terms ranging from three months to five years. It’s important to note, however, that CDs are not risk-free. You could face an early withdrawal penalty if you withdraw your money before your CD matures.
8. Diversify Your Investments
Sound investment strategies can help offset inflation. Ensure you have a properly diversified portfolio of investments. This is because certain assets tend to hold their value better than others in times of inflation. While these assets are not guaranteed to keep pace with inflation, they can help offset losses.
Investments like stocks, real estate, precious metals, and cryptocurrency all perform differently during tough times, meaning no matter what happens in one investment sector, your other ones will likely be okay.
It’s therefore essential to balance out your investment strategy by adding some asset classes that tend to hold their value better than others during periods of high inflation.
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9. Grow Your Emergency Fund
It might not be a fun expense, but if you want to make sure you’re prepared for life’s financial unknowns, building an emergency fund should be a top priority. Save up at least three months of living expenses in case of job loss or medical emergency.
Set up an automatic transfer from your checking account into a savings account every month. That way, you won’t even notice that money is missing until it adds up and makes a real difference in your security and peace of mind.
10. Cut Unnecessary Expenses
If your income is rising at a slower rate than inflation, you can’t afford to maintain your current lifestyle. Be brutally honest with yourself and pare down expenses. It may be painful in the short term, but it will help you weather tough economic times.
11. Improve Energy Efficiency
With record oil prices, look for ways to save energy. Being energy efficient is relatively easy and cost-effective. You don’t need to be a clean-energy guru or an environmental crusader. Make small changes like utilizing innovative technology, such as LED light bulbs and automated thermostats.
12. Buy Quality Products that Last
By buying a high-quality product, you won’t have to worry about replacing it as often, saving you money in general. Shop at recognized stores that offer warranties and guarantees on their products, so if anything goes wrong, you can get your money back or exchange it for something new. This strategy is beneficial for expensive purchases like cars and appliances.
Treasury inflation-protected securities (TIPS) protect investors from inflation. TIPS pay interest based on consumer prices always to remain ahead of inflation. The fixed-rate interest payments come twice a year and come in 5, 10, and 30-year terms.
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Investments to Combat Inflation FAQs
Everyone wants to know how best to counter inflation rates and higher prices. Here are some of the most frequently asked questions (FAQs) regarding inflation.
Should I Change How I Invest for Retirement During an Inflationary Period?
To weather an inflationary period, use inflation-protected bonds and choose a portfolio with an expected greater return than your inflation rate.
Can Inflation Be Reversed?
The government can use wage controls, price limits, and a contractionary financial policy to reduce inflation.
How Is Social Security Affected by Inflation?
Social Security payments are indexed for inflation. However, if inflation is high enough, those benefits could reduce in real terms.
The Bottom Line
Inflationary periods are a reality in today’s economy. The first step is understanding that dealing with higher inflation is not just about cutting costs and living frugally. Use these strategies to deal with inflation and stay on track toward your financial goals!