Updated: May 30
Author: Duc Huy Nguyen
Date of Publication: 06/05/2023
You might have noticed that you have a harder time making ends meet. Or that your vacation and driving have become more expensive than in the past. This is a phenomenon where the cost of living is increasing and it is called inflation. In this article we will help you deal with inflation and stand your ground financially.
Tips to protect yourself from Inflation
This is the time to prioritize building up your emergency fund more than ever. In particular, you need a financial buffer that you can fall back on. This financial buffer can protect you from unexpected expenses and the need to borrow at high-interest rates. Furthermore, you will also lose purchasing power. Generally speaking, the rise in wages can’t keep up with the rise of the cost of living. So, having some cash on the side could help you out. This can give you peace of mind as you don’t need to stress when you need some extra money.
You should start paying off debts aggressively. Inflation can impact interest rates for the worse and increase it. So, during times of inflation, start actively reducing your debt. For example, you can start paying those with the highest interest rates.
Naturally, if your cost of living increases, a boost in income might help you. So, start looking for more streams of income. For instance, selling stuff that you don’t need is a very good idea. You might find something in your attic, who knows? Apart from that, you can consider a part-time job too.
Start saving money where you can or better try to cut costs where you can. A category where you could easily save money is dining out. Moreover, you can do things like making your own coffee instead of going to Starbucks. For example, making things at home will save you a lot of money. Cooking more at home doesn’t mean you can’t also cut back on groceries. So, fFocus on essentials and put a break on the snacks. It’s not only better for your bank account but also for your body. Consider downgrading subscription services as well.
Where should you put your money?
In times of inflation, you might consider investing in Treasury Inflation-Protected Securities or TIPS. These government-back bonds mirror inflation rates. So, if there is inflation, interest rates will rise and if deflation occurs, interest rates will fall. TIPS are by far the best asset to hedge against inflation for the average investor, according to Amy Arnott, a portfolio strategist.
The ideal environment to invest is when inflation levels are around 2%. So, investing during times of inflation could be riskier. However, you should take a long-term approach and you shouldn’t overreact to short-term market movements.
For example, the S&P 500 index is generally speaking a good index to invest in. This is because it returns around 10% more than the 7,9% annual inflation levels we saw this February.
During times of inflation, it might also be a good idea to rebalance your portfolio. This is because growth stocks are generally more sensitive to high levels of inflation than other stocks. Sectors that perform relatively well during times of rising interest rates are more defensive sectors. These could be consumer staples, the finance sector, and the healthcare sector.
The best-performing sector since 1973 is the energy sector during rising and high levels of inflation. This trend continues into the present as oil and gas companies stocks are some of the top-performing stocks in the S&P 500. Furthermore, commodities stocks tend to perform better than most stocks as well.
Commodities like gold and silver might be another asset you want to invest in. In particular, they have an intrinsic value, unlike your cash. So, gold tends to outperform other financial assets, according to research performed by the World Gold Council.
During times of inflation, there is more uncertainty. That is why we would recommend you to cut back on unnecessary expenses. Pay off your debt. Build up an emergency fund. Invest but more defensively and to rebalance your portfolio.