5 Financial Strategies For Coping With Inflation
While there may be some people out there who are not feeling the pinch of inflation, almost everyone else is noticing that their ability to afford things – even basic things like groceries and utilities – is seriously handicapped. It is a difficult time for a lot of families. So what can you do to get through this?
What is Inflation?
Inflation is defined in many ways, but at its most basic, it is an economic phenomenon by which the prices of items are rising while incomes are staying stagnant or, worse, not keeping pace with the rise in prices. We already know that prices generally rise over time. In the 1960s, postage stamps were a nickel, and the average house price was about $22,000. But if price and income increases are proportional, the average person's buying power does not decrease. Right now, that is not what is happening.
Some economists define inflation as too much money in the economy chasing too few goods. Under the laws of supply and demand, when there is too much money in circulation and not enough goods, prices increase, shrinking the capital's purchasing power.
While this idea describes what happens in an inflationary economy, what we see currently is the result of a perfect storm of inflationary factors. One critical factor is high energy prices brought on by government-enforced energy scarcity. When energy costs rise, producing and transporting goods of every type is more costly. But the problem does not end there.
If there is "too much money" chasing too few goods, where is the money? As stated above, it is not showing up in people's paychecks. The "too much money" is the money that has been pumped into the economy as the result of extended and generous government unemployment benefits, "Covid relief" funds backed by debt rather than revenue, and easy credit. In other words, it is money that the government and we are borrowing from the future. When you couple this increased money supply with energy shortages and supply-chain problems resulting from the pandemic, you see that people were given the means to utilize vast amounts of low-cost money and credit to purchase a limited supply of houses, cars, boats, and other stuff. The result: record inflation.
How Can I Protect Myself During an Inflationary Trend?
Government policy has traditionally responded to inflation by tightening the money supply by raising interest rates, thereby increasing the cost of borrowing money. By making borrowing more expensive, people are less likely to access credit. This makes sense to a certain degree but only sometimes works well. Unfortunately, when inflation is as high as it is – in 2022, the annual inflation rate was 6.5% – people who are already overextended financially may need to access even more credit to stay afloat. Consequently, raising rates can harm consumers even more because their debts and debt payments increase as their discretionary income shrinks.
So what strategies can you use to protect your finances? Unfortunately, no magic formula enables individual investors to conquer global inflation. But some strategies can help you weather the storm.
Conserve Cash
Keep the cash you have and cut spending. Yes, your dollars are not buying what they used to, and they probably will buy less tomorrow than they do today. But that does not mean you should spend them now. In particular, don't pay off debt like a mortgage or auto loan if your loan rates are lower than the inflation rate. The good thing about these loans is that the payments stay the same. If your income increases even a little over time, these fixed payments will consume a smaller and smaller share of your income.
If you can conserve your cash, take advantage of high-interest rates to put that money in a Certificate of Deposit (CD) or another interest-bearing account so your cash will grow.
Invest in Inflation Protected Bonds or Short-Term Bonds
If you can park some of your money in investments, consider short-term corporate or government bonds that tie their interest rates to the inflation rate. Like CDs, these types of investments both conserve your cash and allow you to grow it. The returns may not be high, but neither are the risks.
Reallocate Your Investments
The stock market is still reasonably reliable for growing your assets in the long term. Still, you may have to take a second look at your mix of investments. Specific industries do well in a robust economy, while others may suffer. You may want to shift your money toward more "inflation-proof" investments that are less affected by the current state of the economy.
For example, commodities such as metals, energy, and food items like grain and beef will always be needed and consumed in any economy, as will companies that produce the things that stock your local grocery shelves. Industries like retail, tourism, and hospitality will generally see a downturn. Some businesses actually see an uptick when things are bleak: home improvement and auto repair/supply stores may thrive in an economic downturn as people turn to do-it-yourself improvements and fix their cars instead of buying new ones.
Consider Real Estate
If you can afford real estate, it is generally a safe investment during an inflationary period. In particular, purchasing rental property can make your money work for you. Inflation can work in your favor, increasing the market value of your property and the rental rates your tenants pay. If you cannot afford to invest alone, consider joining a real estate investment group or investing in a real estate investment trust (REIT).
Gold is Safe
Gold is a traditional hedge against inflation, and it never hurts to have some physical gold. However, don't put all your eggs in the gold basket. The price of gold can swing widely.
Generally, the price will rise in an uncertain economy and level off or decrease when things are going well. As a long-term investment, there are better ways to grow your wealth than gold. At the same time, gold is a secure asset in that it always has value, is highly liquid, is portable, and has value to everyone worldwide. For many people, owning some gold can bring peace of mind, knowing that at least one asset they hold will always have solid value.
Mountain Financial Can Help
For a lot of reasons, an inflationary economy is never welcome. But that does not mean you should throw your hands up in despair regarding your financial situation. No one has the clairvoyance to benefit financially from every economic trend. Still, there are steps you can take to protect yourself from the worst effects of inflation.
At Mountain Financial, we understand that having all your long-term financial plans hit a snag through no fault of your own can be frustrating, especially when you have worked hard to establish financial security for yourself and your family. If you find yourself adrift, Mountain Financial can help you navigate murky economic waters like this current period of inflation. To find out how we can serve you, call Mountain Financial today.
