Protecting yourself or your family against inflation is the goal of many people around the world right now.
You too should protect your money from inflation because it has the power to quickly dissolve your purchasing power and if you don’t understand it deeply, it could plunge you into debt.
First, what is inflation?
Before explaining how to protect your money from inflation, you should study this concept thoroughly. Otherwise, you might find it very distant or complex.
The first thing you should know is that inflation has direct repercussions on your quality of life and your daily life. Inflation is an enemy that can cause your money to be worth much less in a very short period of time.
It is a palpable phenomenon that has the capacity to pulverize your savings and your purchasing power in the blink of an eye (in the most extreme cases).
Inflation manifests itself, in economic terms, when all prices rise across the board.
It is important to note that in a market economy, the prices of goods and services are subject to change. Therefore, it is common for some prices to rise and others to fall.
However, this does not imply an inflationary process. For us to really speak of inflation, there must be a general increase in prices.
According to the European Central Bank, the result of inflation is that for every dollar you can buy fewer goods and services than yesterday.
In simpler terms, money loses its value, and therefore, you can buy fewer goods and services over time.
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Brief example of inflation
We will now share a brief example with you so that you can better understand this phenomenon and develop strategies to protect your money from inflation.
Let’s say you live in Argentina and you want to buy a commercial property that costs $12,000 dollars, and you have been saving $500 dollars a month for six months.
In that time you would have saved $6,000 dollars. But it should also be noted that the country has registered an inflation rate of 10%.
This means that the car is no longer worth $12,000 dollars, but $13,200 dollars. In other words, instead of having 50% of the accumulated money, you would have 45% (5% less).
The immediate reading of this is that your money has suffered a devaluation. Likewise, the currency has been devalued as a result of the inflationary phenomenon and your purchasing power has been reduced.
Tips to protect your money from inflation
When you are exposed to inflation the value of your savings tends to be diluted over time.
The pandemic has had devastating effects on most of the world’s economies, and as a result there has been a generalized rise in prices.
So much so that some countries have recorded inflation levels not seen in more than three decades.
The International Monetary Fund has estimated that inflation will last longer than expected due to the conflict in Ukraine, labor markets and demand.
In some developed countries, the inflation rate could be around 5.7% (this would be the highest value recorded for almost 40 years).
At the same time, inflation in developing countries could be even higher. This has set alarm bells ringing as the figure could approach 8.7%.
The higher inflation is, the less goods and services you can afford with the same amount of money.
Fortunately, there are some recommendations that could help you protect your money from inflation, such as the ones we will share with you right now:
Apply for a second job
Although inflation continues to accelerate in many countries in the American region, such as Colombia, Venezuela, Argentina or the United States, it is still possible to take advantage of the reduction in unemployment rates.
Ideally, you should find a new job or source of income before your country experiences a major economic downturn.
Some planners and economists believe this measure can help protect your financial lifeline and keep you afloat in terms of money.
Keep in mind that the job market is active and you may find it easier to get a high-paying job under these conditions.
According to CNN figures, the U.S. economy alone added 528,000 jobs in July 2022, making up for all the jobs lost during the pandemic.
This defied expectations of a jobs slowdown in the wake of the interest rate hike recently announced by the U.S. Federal Reserve System.
2. Control your expenses
Defining and controlling your personal expenses is also crucial to protect money from inflation.
The clearer you are about your income and expenses, the easier it will be to design a monthly budget that allows you to cover your fixed and variable expenses, while staying debt-free.
If you do not know how you generate or spend money, you will be more prone to exceed the limits, and this is a prelude to a crisis in times of inflation.
Ideally, you should reduce your expenses, watch your budget, pay your expenses on time and stay away from loans and excesses.
3. Be prepared to incur some recurring expenses in the future
If you anticipate some recurring purchases or expenses you could take care of your pocket and protect money from inflation.
For example, if months of inflation or economic recession are predicted in your country, the ideal is to go one step ahead and take the lead.
A good strategy is to make bulk purchases, at least of everyday items that could go up in price in the future (regardless of whether they are for personal or household use).
On the other hand, you could buy your children’s school supplies before the start of the next academic year.
Make a list of the purchases that you could manage now and estimate how much money you could save if you do it in advance.
4. Define your financial priorities
If your country’s economy is inflationary, you need to define your financial priorities as soon as possible.
This implies leaving aside non-essential expenses and forgetting about luxuries or eccentricities that could completely disrupt your finances.
You don’t need to buy clothes or shoes every day, much less plan a vacation to Europe in the midst of inflation.
Those are not financial priorities under any circumstances, and if you don’t have this clear you could face serious liquidity problems.
5. Diversify your sources of income
At the beginning we told you that you would have to look for another job to protect money from inflation.
But the truth is that the ideal scenario is to diversify your sources of income as much as possible in dollars (since it is a safe haven currency).
You can take advantage of the Internet to run profitable online businesses during your free time.
You could work online answering surveys, translating texts, generating content for social networks and much more.
You can offer your freelance professional services, or monetize your passions, so that the money doesn’t stop flowing into your accounts.
The more income you generate, the more robust your finances will be and the more prepared you will be to fight inflation.
6. Don’t ask for credit
In times of inflation, it is common for monetary policies to be based on rising interest rates on public debt.
This means that consumer credits will be higher; especially those linked to housing and loans.
Consequently, there will be less money circulating in the economy, and in turn, the demand for goods and products will slow down.
If you have credit cards, it is best that you do not have outstanding balances, or that you make full payments instead of installment payments (this will prevent interest from preventing you from amortizing your debt).
7. Don’t save in a bank account
If you are determined to protect your money from inflation you should discard saving in bank accounts immediately. This is one of the mistakes when buying dollars for example.
In fact, if you already have money in the bank you need to calculate the inflation of your country and subtract that value from your capital on an annualized basis.
In these cases, the best way to fight inflation is to make sure that money always works in your favor and not against you.
Therefore, you should make sure to invest in assets that generate profits, income, dividends or benefits in the medium and long term.
Leaving your money in your bank account will not help you fight the inflationary phenomenon, and in the long run it will only make you poorer.
8. Protect your emergency fund:
An emergency fund plays the role of a financial cushion. Basically, it offers you the necessary liquidity to face fortuitous and unexpected situations.
It is made up of cash that could get you out of trouble in an emergency.
Experts suggest that these funds should be enough to cover your fixed expenses for at least three to six months.
So, if your monthly fixed expenses are $700, your minimum emergency fund should be $2,100.
Don’t underestimate the importance of the emergency fund, (especially during times of inflation), as it could save you from debt.
9. Make high-yield investments
Investing in high-yielding assets is also key when it comes to protecting money from inflation.
The secret lies in investing money in assets that offer you a return equal to or higher than inflation.
For example, it won’t do you any good to invest in an asset that gives you a 10% return if your country’s inflation rate is 12%.
Are you wondering which are the most convenient liquid assets in which you should invest in the midst of an inflationary spiral? Here are some of them:
- Global index funds.
- Corporate stocks.
- Real estate funds.
- Medium and high risk collective portfolios.
10. Sell properties
If you have a property that does not generate income, or passive income, this could be a good time to list it in the real estate market.
Fortunately, the real estate market is showing signs of recovery globally. In fact, in the United States, home prices registered a year-over-year increase of almost 15%.
Considering that interest rates have also increased, a good strategy would be to try to sell before they continue to rise.
If so, mortgage interest rates will be harsher and it will cost people more money and effort to buy new homes.
On the other hand, if you cannot sell your property you should at least refinance your mortgage loan, in order to secure a lower fixed rate.
The winning strategy would be to generate a fixed rate home equity loan, but this is something you will have to negotiate directly with your lender.
It should be noted that the market price of investment property correlates strongly with general consumer price indexes.
Therefore, when inflation rises, the price of land also rises at a similar rate.
If you understand inflation, you protect your finances:
It is undeniable that the major actions to combat inflation should be taken by governments and central banks of countries around the world.
However, you can also follow some tips, steps and recommendations to mitigate its effects and protect your money from inflation more efficiently.
In short, knowledge is power, and if you understand the inflationary phenomenon, you will be better prepared to take care of your pocket and protect your assets.