The term “Inflation” refers to the rate at which currency falls or rises. A simple way to understand inflation is to describe the gradual rise in prices or the slow decline in purchasing power of your currency over time. Inflations can drastically erode your purchasing power over a short period. These fluctuations in prices occur broadly across many sectors or industries, such as the automotive and energy industries.
While losing the value of your dollar bills can be frustrating, economists consider inflation as a sign of a healthy and prospering economy. This is because inflation forces people to spend or invest a small amount of their savings rather than stuff it all in a cookie jar or inside your pillow. However, once inflation spreads throughout the economy, the expectation of further inflation becomes an overriding concern in the consciousness of consumers and businesses.
Typically inflation occurs from an increase in production costs or an increase in product or services demands. In the U.S, the chief measures of inflation are Consumer Price Index, Personal Consumption Expenditures Price Index, Producer Price Index, and the Federal Reserve to monitor inflation and adjust a monetary policy accordingly.
How to protect your wealth from inflation?
Diversify your investments
You can maintain your purchasing power over a more extended period by determining the right assets for your investment.
You can also protect yourself by signing up for Treasury Inflation-Protected Securities, or TIPS. The TIPS principal is measured by the Consumer Price Index and increases with inflation and your paid interest rate but decreases with deflation. However, when your TIPS bonds mature, you are paid an adjusted principal over a long period.
Adding TIPS to your accounts can help you balance your fixed income or indexed portfolio to inflation. TIPS is backed by the U.S federal government, ensuring you a safe investment and an effective way to diversify your investments.
Evaluate Your Budget
Evaluating your monthly expenditures and expected budget is an effective way to save money and reduce cash outlays. You can also refinance your loans and consolidate debts for a lower rate and instead use that money to invest in yourself. Keep track of your cash flow by monitoring your income, expenses, and savings.
Cryptocurrency can be defined as a digital or virtual currency stored in digital wallets and does not require bank verification for the transaction. It is monitored and organized by a peer-to-peer blockchain network, and the tractions are recorded in a public ledger. Bitcoin is a type of cryptocurrency that can protect you against inflation because it offers limited supplies. However, it is challenging to incorporate bitcoins, ether, litecoins or monero into your diverse portfolio.
The stock market tends to beat inflation with its rate of returns; however, your money growth would be slower in times of deflation or inflation. Financial advisors suggest investing in sectors or industries that follow the movement of the economy, such as the energy or water sector since stocks of these sectors rise in value according to the economy. You can also invest in real estate since the property’s value significantly increases during periods of higher inflation.