When inflation sets in, savings lose value, which can be devastating if it happens too quickly. Economists like to see a bit of inflation in an economy, since that encourages consumption and investment. However, too much inflation can deprive many people of hard-earned money just when they need it the most.
Fortunately, there are effective ways to guard against this sometimes-unavoidable economic phenomenon. Learn about the following five techniques and you will be well-prepared to protect your own money against inflation should the need ever arise.
1. Invest in Commodities
Broad-based inflation happens when the value of money drops relative to that of actual, physical goods. That means paying more for items than in the past, whether they are personal possessions or industrial resources.
The simplest way to guard against this threat is to exchange cash for relatively liquid commodities before too much inflation sets in. A guide over at IRA Investing, for instance, details how buying gold can protect savings against inflation even through tumultuous economic times.
There will always be quite a few commodities to consider for use with this popular strategy. Precious metals like gold are common choices because they tend to be easy to buy and sell.
Many precious metals also have inherent value for reasons beyond their cosmetic appeal. Gold, for example, is used in enough industrial and commercial applications that demand for it rarely flags for long.
2. Buy More Stocks
Runaway inflation often causes widespread damage, but people who hold too much cash inevitably fare the worst. Interest rates on saving accounts and certificates of deposit might rise in the face of inflation, but they rarely make up for its cumulative effects.
Stocks tend to fare better, even if their returns decline relative to recent history. A portfolio that is tilted heavily toward cash holdings can often be made more resistant to inflation simply by adding more equities to the mix.
3. Switch to Inflation-Adjusted Instruments
Although it has not been a pointed problem for a few decades now, inflation has troubled investors throughout history. Financial engineers have devoted plenty of time to creating investment opportunities that specifically account for inflation.
Even the investor-facing arm of the Treasury Department offers securities designed to appreciate more than the current inflation rate. While these instruments will normally not produce large returns otherwise, they can become quite attractive when inflation sets in.
4. Acquire Some High-Yield Bonds
Just like cash, bonds held when inflation ramps up lose their value as time goes on. Once investors, businesses, and governments have become accustomed to a certain rate of inflation, bond yields normally rise in response.
Buying lower-rated bonds than usual can be a good way to guard against inflation while still generating real returns. Of course, that does mean becoming exposed to more risk, but this is typical of many safeguards against inflation.
5. Spend Less
When the buying power of some savings declines with every passing, it can be tempting to start spending more freely. That can be a rational response, as with accelerating plans to make purchases of long-term value.
People who find ways to buy less for themselves can also devote more of their income and savings to inflation-resistant investments. This strategy can be combined with any of the four above to amplify their effectiveness.
While inflation can be scary, it can be normally be dealt with, too. Become familiar with these five techniques and you will be prepared to fight back if excessive inflation should rear its ugly head.