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In recent years, the United States has experienced inflation rates that are significantly higher than the norm, with figures reaching 7.1% in 2021, 6.5% in 2022, and 3.4% in 2023. Such inflation levels can erode purchasing power and create financial instability for many. However, there are strategic measures residents can take to protect themselves against the rising tide of inflation.
Before diving into the strategies, it’s important to note that not every strategy suits every investor. Everyone has differing risk tolerances and financial portfolios that make some strategies better than others.
This article dives into the basics of what you can do. For what you should do for your specific investment portfolio, it’s best to receive personalized guidance from a financial advisor.
Inflation-Protected Securities
Utilizing Treasury Inflation-Protected Securities (TIPS) is a cornerstone strategy for defending investments against inflation. These government bonds are not only backed by the U.S. government, making them a low-risk investment, but they are also indexed to inflation, ensuring that the value of the bond increases with inflation, as measured by the Consumer Price Index (CPI).
Interest is paid semiannually at a fixed rate, which is applied to the adjusted principal. In short, payments rise with inflation and fall with deflation, providing a reliable hedge against inflationary pressures.
Diversify with Stocks
Equities have historically been effective in outpacing inflation over long periods. Companies can adjust their prices to reflect increased costs due to inflation, potentially leading to higher profits and stock values.
A diversified portfolio that includes stocks from sectors known to perform well during inflationary periods, such as consumer staples, healthcare, and energy, can offer protection against inflation. However, balancing the portfolio according to individual risk tolerance and investment goals is essential.
Real Estate Investment
Real estate is traditionally a solid hedge against inflation. However, this may not be for everyone, with interest rates hitting recent highs and home prices surging.
Property values and rental income tend to increase when prices do, reflecting the inflationary trend in the economy. For those who may not have the capital to invest directly in property, Real Estate Investment Trusts (REITs) may offer a more accessible option.
REITs allow individuals to invest in portfolios of real estate assets, and they often distribute most of their income as dividends, providing an income stream and potential inflation protection.
Commodities and Precious Metals
Commodities such as oil, gold, and silver have historically been favored as hedges against inflation. For example, when inflation levels were relatively low at the beginning of 2020, gold was $1,552 per ounce. At the start of 2024, gold hovered around $2,049 an ounce.
Their intrinsic value tends to rise along with the general price level in an economy, providing a natural protection against the erosion of purchasing power. Precious metals, particularly gold, are often viewed as a store of value during turbulent economic times.
Increase Savings in High-Interest Accounts
In an inflationary environment, the value of cash savings can erode quickly. However, placing savings in high-interest accounts, such as high-yield savings accounts, money market funds, or certificates of deposit (CDs) offering rates that may keep pace with or exceed inflation, can help mitigate this effect. These financial products can offer a safer avenue for cash reserves, though it’s important to stay informed about the terms and conditions, including withdrawal penalties and interest rates.
Focus on Career Growth and Income
One of the most direct ways to counteract the effects of inflation is by increasing your income through career advancement, acquiring new skills, or starting a side hustle. Higher-income provides more leeway to adjust spending and saving habits and offers more investment opportunities in inflation-hedging assets.
Budgeting and Expense Management
If a side hustle isn’t your thing, effective budgeting and expense management are critical during high inflation. Monitoring spending patterns, prioritizing essential expenses, and cutting unnecessary spending can free up more funds for savings and investment.
There are dozens of reputable budgeting apps – many connect directly with your bank account to analyze spending on the fly.
By adopting these strategies, you can not only survive but thrive during periods of high inflation. It’s about being proactive, informed, and flexible in your financial planning to ensure long-term stability and growth.