A definition of inflation goes like this:
Inflation is viewed as a hidden risk pressure that provides an incentive for those with savings to invest them than have the purchasing power of those savings erode through inflation.
Inflation is like a sneaky thief. Its effects creep up on you over a sustained period of time (like grey hair and belly fat). With the purchasing power of the rupee eroding gradually over time, we count on an increase in our salaries to make up for this. But, what happens when you retire sometime in the distant future? What can you do to cushion yourself against inflation in the long term?
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Let’s beat inflation!
There are two broad strategies that you can implement:
1. Invest For The Long Haul
Make sure you are invested for the long term in such a way that the performance of your investments more than makes up for any kind of inflationary effect that your funds would have to go through. This can be done by investing in instruments that beat inflation, such as Mutual Funds.
2. Be Mindful
You need to monitor inflation rates. When inflation starts to move up, you need to be ready to capitalise on any changes as they happen.
Additional Reading: Investments That Protect You From Inflation
Here are some steps you can take that will help you better implement the strategies mentioned above:
#1 Buy A House
Do you know that if you buy a house today, it would act as an automatic hedge against inflation? Your house is a fixed asset, which becomes more valuable with time because of asset price inflation.
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#2 Try Becoming A Landlord
If you invest in real estate today, you can become a landlord by giving your property out on rent. Although rent is subject to inflationary pressures as well, you could raise the rent when the cost of living goes up everywhere else.
#3 Up Your Earning Quotient
The best way to battle increase in prices is to remain employed or ensure that you have some other income stream going. As you know, wages and earnings tend to go up along with everything else. If you are retired, you can create an income stream using your corpus.
Additional Reading: Your Way To Retirement
#4 Be The Boss
If you own a business, you can always raise rates, fees and prices if the cost of operating your business go up. There are also incentives provided by the government, such as tax holidays, that cater to entrepreneurs.
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Ensure that you have a ‘well rounded’ portfolio through intelligent asset allocation. This means you need to have a good mix of stocks, bonds, cash and other assets.
#6 Try Alternative Investments
When inflation starts to rise, it may be best to invest your short-term funds with alternate instruments that might provide higher returns. For instance, short-term debt funds are a good alternative to Fixed Deposits.
#7 Lock-In Rates
When interest rates seem to be falling, like they are now, you should try to zero in on the best rates for the long term because you don’t know how much further they may fall. By the time interest rates start rising, you can move your money without penalties.
#8 Consider Commodities
The popular belief is that buying commodities helps you hedge against inflation. Some commodities are safe havens. Gold is the most sought after since it can complement a diversified portfolio and help hedge against risks.
You can buy gold in the form of gold coins, gold bars, exchange-traded funds and of course, jewellery. Investing in gold can help protect you against inflation, but make sure you don’t let it exceed 10% of your portfolio so as to combat volatility in prices.
#9 Debt Is Good
When you have loans in your portfolio, you actually gain from a rise in inflation. This is because the value of money owed is worth less over time. For instance, if inflation rates go up by several percentage points, the money you have borrowed in the past would be worth less than the money you borrow at current rates.
Having a mélange of loans also helps your Credit Score, as long as you repay them on time. However, don’t borrow beyond your capacity.
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#10 Take A Cut
This might be hard to follow, but it has multiple benefits. Think twice before you buy anything and practice abstinence. When prices of items go up, try and avoid making exorbitant purchases. Alternatively, you could even change your shopping habits and start buying at lower cost places.
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Small changes today mean big savings tomorrow. Try some of them and see if they make a difference.