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It shouldn’t come as much of a surprise that inflation is coming down the pike. After all, we’ve seen governments around the world print more money in the last 18 months than in the whole of history combined. Eventually, such behavior is going to show up in higher prices.
But there’s a problem. Higher prices don’t just mean more money spent at the grocery store. They also mean a reduction in people’s savings wealth.
For years, we have been used to inflation running at 2 percent and many of us have found ways to deal with it. Historically, we could put our money in the bank and get a real rate of return (because the interest rate was 5 percent). But these days, that’s no longer the case. You’re lucky if you even get 1 percent.
But with inflation picking up yet again, putting money into regular savings vehicles is a bad idea. As https://www.accuplan.net/blog/inflation-self-directed-ira/ points out, even IRAs are at risk.
So as a saver, what can you do about it? First we will start with what not to do.
Don’t Put Your Savings Into Cash
In general, you shouldn’t keep your savings in cash. If you think inflation is around the corner, you certainly shouldn’t do it. High levels of inflation will eat into your wealth and reduce the real value of your money in the long run.
Small percentage increases in the inflation rate can have a considerable impact over many years. Moving from three to four percent inflation over twenty five years doubles the lose of value your money over that time period.
Cash is a losing asset. As Ray Dalio, billionaire investor at Bridgewater Capital says “cash is trash.” And he is largely right. You want some in your bank for day-to-day transactions, but that’s all. The rest of your money should be in other assets.
The question is which assets to put your savings in?
Short-Term Savings Options
As a general rule, you need some cash in your bank account for expenses and emergencies. But if inflation is high, where should you keep it?
You can still continue putting a small amount in your main checking account – enough for your monthly bills. But it can be good to put the rest in safe financial assets and products that offer a return that can reduce inflation’s erosion of your purchasing power.
For instance, choosing online accounts might be a good option. Here you tend to find better rates than at the main banks which offer low interest rates.
You might also want to choose a high-yield reward checking account. Some of these offer around 3 percent interest on balances above $10,000, essentially maintaining the value of your savings if inflation runs at 3 percent. They may also offer other perks, such as cashback up to a certain value every month to encourage you to stay with them. Generally though, there are many other better returns on your investments and these types of accounts might fine you if the balance falls below the minimum amount.
Another cash-based option is certificates of deposits – or CDs. These provide you with a guaranteed interest rate, so long as you agree to deposit money in the bank for a fixed period. Be careful with CDs, though. Check the withdrawal fees and any other fees. You may have to pay extra if you take your money out early. With any short-term savings options, be sure to do your homework on all the different requirements, fees, and other items that could affect your savings negatively.
If you want to save money long-term and protect your wealth, where should you keep it? Here are some more ideas.
Long-Term Saving Options
You might want to consider keeping your savings and wealth in property. When inflation is high, the price of goods and services goes up, but so too does the value of property. Over recent months, we’ve seen record-breaking surges in house values reflecting changes in the underlying market. People with property are seeing tremendous equity gains. Prices are going up very quickly in some markets.
But this is precisely what you would expect when inflation is high. Extra money available in the economy is pushing up purchasing power for lots of people. And that is driving up prices as they compete for housing. So long as inflation exists, this process will continue.
Investing in property, though, is a long-term game. It’s quite hard to dip in and out of the market at will because of transaction costs. So if you buy a house or other type of property, you’ll need to consider the short- and long-term value gains. Also make sure the yearly maintenance, HOA, taxes, insurance and other costs won’t be more that the potential profits you could make from the property.
Another alternative is to choose inflation-proof currencies. These are forms of money that nobody, not even governments, can inflate.
There are many inflation-proof currencies that you could choose, but the main ones today are gold and bitcoin. Gold is popular because it is hard to extract from the ground and mint into coins. Most of the easy-to-reach gold has already been harvested and so adding more to the money supply is a significant challenge. Do remember that all commodities fluctuate positively and negatively.
Cryptocurrencies such as bitcoin are another good option for those worried about inflation, says https://www.moneyunder30.com/alternatives-to-bitcoin. Just like gold, no individual can inflate the money supply. Instead, new coins are added to the system at a slow rate. Eventually miners will not be able to add any new coins at all but there are over 80+ types of cryptocurrency (the last I read about it) and different crypto can have different value and possible protection power against inflation. While I have a teeny tiny amount of money wrapped up in crypto I’ve watched my “investment” going from $100 to $30 to $130 in the 3 months since I purchased $100 USD.
If inflation strikes, sometimes you’ll notice that the value of these alternative currencies goes up. This means that you can sell them back into the market at a higher price, effectively protecting yourself against inflation long-term. Keep in mind that cryptocurrencies can swing high and low even within one day and governments around the world are now trying to create their own crypto so they can still keep control over the value of the money.
Stocks And Shares
Mainstream news outlets generally discourage people from investing in stocks and shares. But they are the real secret of the super-wealthy. Virtually all of them have large stock portfolios.
Some stocks and shares have the possibility to protect against inflation. When you buy them, you are investing in specific companies own a small percentage of the company. During inflation, firms raise their prices, so the nominal value of their profits goes up. This then pushes up the nominal value of shares, since the profits are now higher.
In other words, buying company profits can help keep you one step ahead of inflation. But there is a risk factor for any savings plan you use so always remember that and don’t put all your eggs in one basket! Companies tend to be among the first agents in the economy to experience inflation, and so buying stocks early on can actually help you gain from the loss of purchasing power elsewhere in the economy.
Inflation also encourages people to pile into stocks for a second reason: the declining value of money. When inflation is high, people are less willing to hold onto money because of the higher opportunity cost. So they naturally look for alternatives, such as shares. Increased demand then increases competition for a limited number of shares which, again, pushes up the price.
Shares also could make massive gains over the coming months and years because of this effect. If inflation really does hit, values will rise faster than the historical nominal average.
Inflation is worrying for some people, but not all. Depending on your investment strategy, it is actually something that you can benefit from. You could even view it as an alley, especially if you are the type of person who owns stocks or property.
If you are a borrower, inflation could also benefit you. It will reduce the real value of the money you owe, making it easier to pay off your debts from income. Be wary, though. If inflation rises too much, banks will increase the interest they charge on loans and mortgages. And if you have an adjustable rate, that could be a problem.
Lastly, remember that inflation won’t last forever. Eventually, you’ll need to flip back to a regular wealth strategy. It’s best to speak with a financial advisor that is a professional and can help with best plans and decision making.
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