Over the last few years, you likely noticed the prices of common goods begin to rise. Whether it be food, gas, or other everyday items, this surge in price has been slow but consistent. In fact, the consumer price index (CPI), which measures changes in prices of common goods and purchasing power, has risen 9.1% alone in the last year to record-breaking 40-year highs. With this change taking effect, it’s only natural to wonder how you can make your money last.
What is Inflation?
Put simply, inflation is the gradual rise in price for goods and services in an economy. As the price rises, the value of a currency becomes less and less. There are a number of factors that can contribute towards inflation, such as rising prices in raw materials, lower interest rates, consumer demand, and more. As inflation rises, the Federal Reserve tries to regulate it by increasing the interest rate on borrowing to reduce the supply of money. Without money, consumers are less willing to make purchases which helps drive prices back down.
5 Tips for Protecting Your Wealth from Inflation
When inflation is high, the Fed aims to stabilize the economy by reducing the supply of money in the market. This is done using the process outlined above. However, this correction does not take place overnight. Inflation can go on for years and, as an example, an inflation rate of 10% with an interest rate of 1% would make $100 worth only $62 in five years.
Due to this potential drop in the value of your savings, it’s only natural to wonder how you can protect your nest egg from this effect in the near-term.
1. Diversification is key.
Building a well-diversified portfolio is an excellent strategy for staying ahead of inflation. Many experts recommend a 60/40 split of stocks and bonds, respectively. As always, be sure to make informed investment decisions and turn to trusted advisors for help as needed. Generally speaking, it’s best to choose shares of companies or asset classes that are recession-proof, meaning their service or product will always be in demand regardless of the state of the economy.
Investing in the stock and bond markets can certainly carry risks, but it’s an excellent option to consider when reducing the amount of cash you have on-hand.
2. Don’t stack the cash in your portfolio.
To that end, many people often pull out of the stock market or other investments during periods of high inflation, as well as during economic downturns. However, having piles of cash on hand during a period of high inflation is counterintuitive, as the value of that cash will be lower for the foreseeable future. Had you left that cash in investments, it’s possible that the value would have grown in-line with inflation and given you more wealth once inflation drops. Avoid keeping extra cash on-hand during these times of higher inflation.
3. Recalculate your emergency fund.
Part of having wealth is keeping an emergency fund in your savings account that can be used for a rainy day. Many experts recommend keeping around 3-4 months’ worth of expenses for a worst-case scenario. However, the value of that emergency fund will shift with the rising inflation. While it may have been 4 months’ worth of expenses six months ago, it may only be worth 3 months now. As inflation rises and the value of currency drops, allocate enough money to your emergency fund to keep its value high.
4. Look into TIPS.
Treasury inflation-protected securities (TIPS) are government bonds indexed to inflation. This means that, as inflation rises or falls, the interest rate offered on TIPS will move concurrently. Interest is paid out every six months, and they are offered in maturities of five, ten, and thirty years. Since TIPS are offered by the U.S. government, they are considered to be one of the safest investments to make. Additionally, the five-year maturity option means you can purchase the bond for a short-term time horizon.
5. Contemplate real estate.
Currently, housing market interest rate loans are still at 30-year lows, hovering at 4.09% and 3.32% for 30 and 15-year rates respectively. However, as level of inflation rises, these interest rates will begin to rise in response. For those of you who are looking to lock in property for a lower all-in payment, now would be a better time than at the height of the inflationary period.
Grow Your Wealth Today!
Growing wealth on your own can seem like a daunting task, but we here at Royal Oak Financial Group are ready to help. Our advisors are experts in retirement planning, wealth management, financial planning, and tax planning. Our goal is to help clients maintain healthy portfolios through their retirement, including making educated decisions during poor economic times. If you’re in the Worthington, OH or Lancaster, OH areas, don’t hesitate to reach out and contact us today to see how we can create a personalized investment strategy for you.
