Many people who save up extra money over time want to know how to hedge against inflation as an individual. Inflation is when the purchasing power of an amount of money gets smaller because of a general rising cost of goods and services over time. Beating inflation means investing in things that hold their value or grow in value as the dollar’s purchasing power becomes less in successive years. There are many ways that individuals can protect their money from inflation, and following some basic guidelines will help savers to make the most of the money that they have put aside for financial stability in the future.
Pursue due diligence on investment options.
Due diligence means researching the specific nature of an investment to determine how much it should yield over time in the form of gains, and how much risk you face in terms of potential losses. Due diligence also means educating yourself on investments, asking questions about past gains, expenses and more before buying.
Sources for information include Money and Forbes magazines, a prospectus of an investment you are considering, or numerous articles online such as Investopedia or Investment News.
It would also be helpful to speak with a financial advisor. Certified financial planners charge either by the hour or a percentage of the investments they make for you.
Look at your maximum contribution as an “inflation hedge.
” The maximum that you’ll want to put into inflation-beating investments is the money that you can spare from your household budget. Money that goes into long-term investments is generally money that you will not need in the immediate future.
You should always have on hand at least 6 months worth of living expenses.
You don’t want a lot of cash sitting around, but if you get into an emergency situation, you don’t want it to be all tied up in long-term investments, either. Find a good middle ground for your investing strategy.
Collect all of your investment cash in one easy account.
In order to hedge against inflation, you’ll be moving your money from other savings accounts, where the money isn’t growing very fast, into other places where it can keep up with or even outpace inflation. You want to be able to move your money quickly once you find good investment opportunities.
Once you have determined your “deployable capital” amount, investigate real estate, stocks and bonds, buying gold or any other kind of opportunities for investing to beat inflation. Diversification is also important so if one type of investment doesn’t produce good results you haven’t lost all your money.
Financial experts advise taking 120 and subtracting your age. The remainder is the percentage you should invest in stocks and the rest in bonds. You can also find asset allocation modeling calculators online that will help you assess how risk tolerant you are and how close you are to retirement.
Consider real estate.
This is a popular way to beat inflation. You can help beat inflation by paying off the house you live in early, as property values generally keep pace with inflation. You can also invest in additional real estate, whether it’s a summer home or rental properties.
Contact a local real estate broker with experience in buying rental properties. Go to the website of a real estate company and read the backgrounds of each broker. He or she will know which areas in town are likely to increase in value.
Take an adult education class to learn how to be a good landlord and follow all laws if you are considering buying rental properties.
Choose stocks and bonds.
Rising prices in the economy are usually good for increasing the value of stocks. If you are looking for an income stream that keeps pace with rising prices, consider Treasury Inflation-Protected Securities. These are government-issued bonds that guarantee their value will rise with inflation (measured by the Consumer Price Index), while their interest rate will remain fixed.
Purchasing international bonds will provide diversification and generate income from their dividends. You will be investing countries that might not be experiencing inflation.
Evaluate investing in gold.
Gold is a good inflation hedge, as it usually retains or increases its value during inflationary periods. You can also buy gold in the intangible, non-physical form, generally through the stock market. Gold can also be easily sold (hopefully at a profit) if you need cash for other transactions.
Choose investment options for your 401(k) account.
If your employer offers a 401(k) retirement investment account, be sure to at least invest in the minimum percent of your salary to obtain matching funds from your employer, if offered. If you are in your 20s or 30s, you can choose more aggressive or risky investments that will pay off over time. If you are closer to retirement age, choose a balanced fund that is a mixture of stocks and bonds.
These 401(k) funds often beat inflation, barring any risky investment by money managers, or a general market downturn.
Contact a brokerage or agent.
No matter what kinds of assets or securities you want to invest in, it’s likely that you’ll need a middleman, someone to help establish the trades that put your money into inflation-beating purchases. For stocks and bonds, you can work with an online brokerage or other financial planner or brokerage representative from such companies as Fidelity, Vanguard or T. Rowe Price.
Track your investments carefully.
You’ll want to keep track of gains over the years, so that you can pull out money that isn’t performing well, swap assets around, or take some continuing strategy that will boost your chances of success. You’ll also want to keep the costs basis of your investments on hand, so that taxable gains in future years can be calculated.