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7 Ways to Manage Your Personal Finances to Counter Inflation

Published: December 30, 2021
Sticking to a budget that avoids items affected greatly by inflation can help protect finances. (Image:> CC0 1.0)

Americans who are seeing their purchasing power erode at the fastest rates in decades are concerned over how long inflation will stay at high levels. Prices of essentials like food and rent to gas and cars have all gone up. The Consumer Price Index (CPI), for November 2021 soared 6.8 percent year-over-year. This was the fastest rise since 1982.

Many experts predict that inflation will extend into 2022. While a rise or fall in inflation is not under one’s control, making the right choices and financial decisions will help you to minimize its impact. Here are seven tips to protect your finances from inflation.

Adhere to a Budget 

Set up a budget that particularly takes into account the types of expenses likely to be impacted by inflation like food, healthcare, utilities, education, and transportation. Find out ways on how you can stretch your budget by shopping at less expensive stores like Trader Joe’s and Costco. 

Invest in Commodities and Real Estate

Another way to tackle inflation is by investing in commodities like oil, precious metals, wheat, corn, and natural gas. As inflation drives the prices up, the commodity prices will consequently rise as well, leading to good returns to investors. You can invest in commodities through exchange traded funds (ETF), futures contracts, and options. 

Investors in real estate also stand to gain over the long term. Real estate is the ideal hard asset that sees its greatest price increase during high inflation. It also benefits investors who are earning income from rental properties as higher home prices often lead to higher rent.

Review your Mortgage and Other Debts 

Homeowners who availed a mortgage before the COVID-19 pandemic should consider refinancing their homes while mortgage rates remain low. When prices go uphill, it would be wise to pay off the debts or make them less expensive.  

Consider Investing in Stocks 

One of the primary ways to beat inflation has been to invest in stocks. This is because stocks have a strong performance record. The returns from equities have exceeded inflation for more than 90 years. However, while investing, one should primarily focus on stocks that tend to perform well in the inflationary period. These include energy, healthcare, building materials, food, and technology.

Avoid Holding Fixed-Income Investments that are Long-Term 

Putting money into long-term investments that yield interest at a fixed rate could be the worst investment decision during periods of high inflation. Fixed-income instruments include bonds and certificates of deposit (CD). The issue with these investments is that when interest rates rise, the value of the underlying security declines, forcing investors to pull out of the security as they aim for better returns.

Treasury Inflation-Protected Securities

TIPS are a type of bond issued by the U.S. Treasury and designed to provide protection against inflation. Holders will not lose purchasing power as the price of these bonds increases with inflation in general. TIPS pay interest twice annually and the value is adjusted each year based on the CPI. 

The original amount of the bond is guaranteed by the U.S. government at the time of maturity. The corrections made to the principal amount of the bond due to inflation are taxable. So, it would be better to hold them in a retirement account to avoid “phantom income” (income that investors have to pay tax on despite not having received any cash).

Become Energy Efficient 

One of the major causes of inflation is energy prices. Using energy-efficient light bulbs, setting solar panels, buying a fuel-efficient car, and investing in other energy efficiency projects could prove helpful in the long run.