The inflation rate in the U.S went down from 0.3 percent to 0.1 percent last May.
While the drop itself was unprecedented, it does tell us one thing for sure. The economy is not predictable. And if the ongoing pandemic doesn’t stand testament to its unpredictability, nothing does!
That is precisely why you still need inflation protection.
However, before we get into what you can do to protect yourself, let’s make sure we’re familiar with what inflation really is.
What Is Inflation?
In a nutshell, inflation simply refers to the increasing prices in goods and services over time. However, these rising prices also imply a steady decline in the value of the money itself.
Here are some of the reasons this happens:
- An increase in the supply of money
- An increase in National debt
- Higher taxes
- Higher demand for goods and services
- Fluctuating exchange rate
That being said, inflation can occur in different areas of the economy and affect us in different ways.
Types of Inflation and How They Affect You
Inflation is characterized into four major types, based on the rate of change. Here’s a brief explanation of each of these.
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Some types of inflation are seen as good for the economy. Creeping inflation is one of these. This is when the prices within the economy see a rise of less than 3 percent.
Walking inflation is the kind that goes too fast. It can be disruptive because the change is occurring too quickly, seeing a 3-10 percent increase.
One of the more destructive types is galloping inflation which refers to 10 percent or more. This is one of the more extreme circumstances of instability within an economy.
This type is rare, and it’s just as well. This kind of inflation sees a 50 + percent increase.
One of the only times this happened in the U.S was during the civil war.
In addition to these, there are several other types particular to wages, assets and more. However, these are based on commodities rather than speed.
Either way, here is how you can protect yourself from these changes in the economy.
Insurance & Inflation Protection
According to Justin Kimball from Preszler Law, some insurance policies will allow you to purchase ‘inflation protection’ to keep you from getting stiffed by rising cost-of-living expenses.
This can be helpful because the benefits can be designed to increase at a pre-determined percentage within the course of time. For example, if you have an upper limit for health insurance, but over a year the price for healthcare increases, you would be able to receive a raise to this upper limit allowing you for benefits more relevant to your time.
Investing in Bonds and Stocks
Ideally, a mix of both stocks and bonds is considered a great way to keep yourself protected. A 60 to 40 percent mix of your stocks and bonds is a more traditional, reliable way of balancing your portfolio. This is considered much more valuable in the long run.
Investing in Bonds
While bonds often provide you with fixed income, there is a way around this.
For example, short-term bonds don’t require a long-term commitment. These fixed periods generally help you avoid inflation rates altogether. As you continue to invest in newer bonds, even if your initial investment increases due to inflation, your returns will increase as well.
Additionally, you also have the added option of investing in inflation-protected bonds. These are also called Treasury Inflation-Protected Securities or TIPS.
Investing in Stocks
Stocks are a great way to protect yourself from inflation. That is because stocks offer dividends that increase with a company’s profit.
This allows you to maintain the value of your money, despite the rising prices of commodities.
Real estate is a great choice because the value usually rises with inflation. Investing in residential or commercial properties can offer you good returns in the long run.
Not only can you rent out your property during this time, but ultimately if you do need some extra case, you can also consider selling.
If you feel incapable of managing your property there are always other options. For example, you can consider hiring a property management company to assist you with tenants, or alternatively consider real estate investment trusts. These companies hold on to real estate while paying dividends to those who invest in them.
It’s a great option of investing in real estate without going through the hassle of actually maintaining the property or screening your tenants.
Gold and Precious Metals
Gold is perhaps, one of the most popular forms of investment. Although you can’t expect consistent yields or dividends like in the case of bonds, however, it does offer diversity to your list.
You need not invest a great deal in precious metals, but in the interest of a diverse investment plan, gold and other precious metals are usually consistently valuable in most markets.
Don’t Put All Your Eggs in One Basket
Perhaps, the biggest takeaway we can give you is to diversify your investments to ensure maximum inflation protection. No plan is foolproof and the economy is not as predictable as those pundits will have you believe.
It’s important to be able to fall back on plan C, D or E if your plan B fails.
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