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Protect Yourself Against Inflation Eating Returns

Posted on | May 24, 2013 | 10 Comments



The word “inflation” can be a scary word for many people especially those that are already retired. However, it should be a word to keep in mind when protecting your investments. Basically the term inflation refers to the price increase for goods and services used by consumers. In the U.S. we measure inflation according to the National Consumer Price Index.

In recent years inflation has gone up to over 2%. This is the highest inflation has been since the Recession and could quite possibly be a sign of things to come.

Why Consumers Should Care About Inflating
Inflation is a growing concern for those on a tight budget or a fixed income because soon products and services they use on a daily basis will be going sky high. This means you would need at least $2,000 in a savings account just to cover household expenses for goods and services.

Here’s an example. Say your household expenses are around $1,850 every month. With inflation every year it means you will still be able to have the goods and services you use every day just not as much. With a 2% increase every year soon your household expenses would be more than you could afford on a fixed income or tight budget

Inflation also affects people who like to save money and have a nest egg. So if you have a savings account it doesn’t grow even with interest as fast as inflation rises. If your savings account has an interest rate of 0.5% and inflation is at 2% your products and services that you use will still cost more than you have in a savings account.

If you are currently saving for retirement and are putting 20% of your paycheck in the bank every month you still may not have enough to retire on because of inflation. The best thing to do is invest your money to ensure you have enough when you want to retire.

Tips To Protect Yourself
Always be aware of inflation as a consumer and as someone who wants to invest their money. If you don’t stay aware of inflation you will end up taking unnecessary risks as an investor. There are many different ways you can invest while protecting yourself.

One of the best ways to protect your money from inflation is investing in stocks. This is because all stocks make money by selling products and services. If prices go up all they need to do is sell the products or services far past the rate of inflation. Keep in mind that inflation is only bad for consumers not investors. Another way to beat inflation is to go back to get an MBA. MBA graduates have better opportunities to fight the rising prices.

The most important thing to remember is that you always have to stay ahead of inflation by protecting your investments and stocks. Once you have your stocks and investments protected it will be easier to protect them from inflation. The general rule of thumb is to pick stocks that are products over ones that are services. It is far easier to sell products than services to protect yourself from inflation.

 

Finance Carn. for Young Adults at The Happy Homeowner
Yakezie Carnival at Growing Money Smart