by Hudson Chastain
As rising inflation rates continue to be of concern, many are left questioning what they can do to hedge against the dangers of inflation. While it is up to governmental policy and the Federal Reserve to limit the rise and fall of inflation rates, individuals can take steps to protect their money during sustained inflation. First, understanding the mechanics and causes of inflation is critical in planning how to handle money. Inflation measures the decrease in purchasing power as the price of goods and services increases over a period of time. Sustained inflation tends to be present when a nation’s money supply grows faster than its economy. Printing more money, giving away more money and reducing the value of the legal currency orother fiscal tools the central bank utilizes can cause inflation.
- Use TIPS to Your Advantage
- One of the better ways to use current purchasing power to protect future interests is to invest in Treasury Inflation-Protected Securities or TIPS. It is wise to invest in these government bonds when experts expect inflation to continue accelerating. These bonds are indexed to inflation, meaning that if inflation increases, the effective interest rate paid on the TIPS will move with it .Therefore, even if inflation increases rapidly, the investment will yield an effective interest rate that moves with the changing economic landscape. TIPS pay interest every six months. Since the U.S. Federal Government backs them, these investment securities are considered some of the safest investments available.
- Leverage Real Estate Holdings
- Leveraging and investing in real estate holdings provides another great avenue to hedge against rising inflation. Real estate investors can benefit from periods of rising inflation by locking in a mortgage at generally low rates for the next few decades. Fixed-rate mortgages allow for the largest expense to remain at the same for a while, despite varying inflation rates. Although peripheral housing expenses may increase with inflation, the monthly housing payment remains the same regardless of rising inflation rates. Notably, the potential for increased home value and prospective future selling opportunities presents an additional incentive to invest in real estate to protect purchasing power.
- Invest in Stocks
- Likewise, investing in value stocks is a safe long-term opportunity to hedge against inflation. Even with short-term worries, stocks tied to economic activity could outperform inflation. Companies with pricing power in cyclical industries or bank stocks, historically linked to inflation expectations, exhibit this growth. Rising inflation will cause their prices to increase, and they’ll subsequently raise prices for their customers. The company’s increase in profit over time could cause the stock price to climb. When investors worry about inflation, the stock market often declines. However, strong companies can push through and use inflation to their advantage, providing another opportunity to stop the devaluation of purchasing power.
- Avoid Holding on to Excess Cash
- One of the main mistakes to avoid when facing rising inflation is holding on to excess cash. While it might seem safer, cash is realistically losing value the longer it sits idle. It is important to invest extra money into a diversified portfolio that considers the rising inflation rates, interest rates and overall economic state. Timing investments wisely is crucial, as the investor may need the money later on and not have access to it.
- Give Gold a Second Look
- Investors tend to overlook gold in a world filled with new-age digital currencies, instant banking and online investing. However, in periods of rising inflation rates, it is time to give gold a second look. Gold has traditionally been the pinnacle of safe investing, which remains true to this day. Gold historically has held value during tough economic times. Its longevity across multiple recessions and other events proves its stability. Even those who don’t have access to gold can easily invest in it through an ETF.
The rising inflation rates are a major concern right now. Still, multiple investment strategies allow consumers to protect their purchasing power. Investing in TIPS, real estate, stocks or gold canensure the money’s value increases with inflation. The worst thing to do is hold on to extra cash andlet it lose value
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