Inflation is a major concern these days. Prices are spiraling out of control in seemingly every area of life. While we can’t do anything about inflationary tendencies, we can take measures to protect ourselves and make sure that we don’t blow all our savings when times get rough.
This article will explore a number of strategies that you can undertake for inflation-proofing your finances and making sure you don’t have serious troubles when the economy goes awry.
Understanding Inflation
Inflation is an economic phenomenon in which the money supply in a given society increases, and it consequently causes the consumer price index to increase. This, in turn, causes the price of goods to go up, and a given currency unit is able to buy fewer goods and services. In other words, it amounts to a reduction in that currency’s purchasing power.
Strategies for Inflation-Proofing Finances
There are a number of ways that you can protect yourself in the event of inflation. While each person’s financial situation is unique, there are certain measures that many people take to protect themselves during inflationary periods. Let’s take a look at several of the more popular and reliable ones.
Creating a Diversified Investment Portfolio
One of the main things that you should do to protect your finances is to create a diversified investment portfolio. Diversification means spreading your investments across different asset classes and sectors such as stocks, bonds, real estate, and gold IRAs so that if one asset class underperforms, the others can help offset the losses.
For example, if you have a portfolio that includes stocks, bonds, and real estate, and the real estate market slows down, your stock and bond investments may help to cushion the blow. Similarly, if the stock market experiences a downturn, your bond and real estate investments may help to keep your portfolio afloat.
Investing in gold IRAs can also be a valuable addition to a diversified portfolio, as gold is often seen as a safe haven asset that can maintain its value during times of economic instability.
Precious Metals as a Hedge
Among the most historically reliable investments are precious metals. There have been many periods throughout history in which currencies have become unstable due to political and/or economic problems, but precious metals are one thing that has truly stood the test of time.
Precious metals are also a good hedge against inflation. When the value of a currency falls, the price of precious metals rises. This is because precious metals have intrinsic value and are not subject to the same inflationary pressures as currency. As a result, precious metals can help to preserve the purchasing power of your wealth over time.
Real Assets Investment
Real Assets are another critical element of a diverse portfolio. Real assets include the categories of real estate, energy assets, as well as things like collectibles.
The types of assets also lend stability to a diverse investor portfolio. Real estate in particular can offer many different types of benefits, including adding passive income and potentially providing tax benefits. And it is considered a good hedge against inflation, as well.
Treasury Inflation-protected Securities
Treasury Inflation-Protected Securities are inflation-protected bonds that are issued by the US Treasury. They work by adjusting their principal value and interest payments in accordance with inflationary tendencies so that investors will always win out. While they are not very popular in the short term, these securities can be a welcome addition to a portfolio in helping to boost long-term savings.
Focus on High-Quality Stocks
Perhaps an obvious measure to take is to invest in the stock market. You should be careful how you do this, though, because some stocks are more reliable than others. Be sure to do your research in advance of any purchase and make sure you are investing in a high-quality stock.
One of the things that you can focus on when deciding which stocks to choose is to focus on core stocks. Core stocks are those that are considered to be most vital for the economy. They include things like raw materials and energy products. When other stocks become unstable during a volatile period, core stocks are usually more reliable because they are essential.
Financial Preparedness
You should be sure that your personal finances are in order in case there is a downturn in the economy. In order to do this effectively, there are basic ways that you should prepare yourself financially:
- Make a budget for yourself. You might be surprised at how quickly small expenses can add up. Look at your monthly expenditures and decide if you really need some of the things that you spend money on regularly such as subscriptions and memberships. If something isn’t really essential, cut it out so that you have more of a financial cushion.
- Make an effort to track every purchase that you make. Beyond creating a budget overall, you should be diligent about tracking all of your expenses, no matter how small. This is the only way to gain a clear understanding of your spending habits and finally stop overspending, leading to greater financial control.
Emergency Fund
When you are preparing your personal budget, try to set a certain amount aside for an emergency fund. This financial safety net can help you fix financial problems and difficulties that might arise unexpectedly, such as surprise medical bills, car repairs, or job loss. It is amazing the number of people who do not “save for a rainy day.” Studies show that 63% of Americans do not have as little as $1000 set aside for potential emergencies.
Recessions and other economic downturns can hit hard. You don’t want to become part of the statistics of people who can’t make it through. Therefore, see what you can cut out of your usual expenses and put into your emergency fund in case you need it. When the economy does turn down – and it inevitably will, at some point – you’ll be glad you did.
Debt Management
Another important element of maintaining control over your finances is managing your debt. First of all, you should be sure that you can make at least the minimum payment on all of your outstanding debts. If you don’t, the amounts that you owe will start to snowball, which is where the debt snowball concept comes into play. This involves paying off your smallest debts first, then moving on to the larger ones helping you stay motivated and see progress more quickly.
You should also take a look at your debts as a whole and think about whether you can eliminate one or more of them. If one of your debts has a particularly high interest rate, focus on trying to eliminate it. This will give you some relief as interest rates build up and can cause you an increasing number of problems.
Final Thoughts
Living through an inflationary period can be difficult. Suddenly seeing costs spiraling up can make you feel like your finances are spinning out of control. These issues do not have to be totally devastating, however.
Make an effort to do the things listed here: find the right kinds of investments (including, but not limited to high-quality stocks), create a budget for yourself and follow it carefully, set aside an emergency fund, and make a concerted effort to deal with your debts. If you take the time and effort to prepare yourself when times are good, you should be able to weather these difficult periods without too much trouble.
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