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What to do with your money in case of inflation

If you have savings, it is good to think now about how to invest them

When the value of the general economy decreases, the large amount of paper money depreciates and inflation occurs, which raises market prices to compensate for the depreciated paper money.

Rising food prices have led to a record rise in inflation since the beginning of the pandemic. Concerns are that higher fuel and electricity prices could lead to further increases in basic food prices in the autumn and winter. Financial incentives along with COVID-19 may also cause rapid inflation, which we will feel later in the future. Therefore, if you have savings, it is good to think now about what to invest them so that they are not “eaten” by inflation.

The profitability of bank deposits is long gone and they are no longer a solution to our savings. The alternative is one – to invest in assets other than cash to protect our savings with the potential to increase them.

How to protect your money in case of inflation?

You can choose protection through “real” assets. While looking for inflation-resistant investments, keep in mind that no investment is fully protected from inflation. They provide you with some protection, but not 100%.

Some things have inherent value. No matter how weak or strong the currency you use for payment, the base value remains relatively constant. Such assets are real estate and precious metals.

Purchase of real estate

People need a roof over their heads and will pay rent, whatever it is. Properties that are bought for rent offer stability – monthly passive income and tax benefits, but mostly protection against inflation. As a rental property owner, you can increase your rent each year to keep up with market prices, which usually exceed inflation. In fact, rent is proving to be one of the most important drivers of inflation. This makes rental property a major investment in fighting inflation.

If you do not yet have your own home, buying one will protect you from devaluing your savings. Homeowners with a fixed-rate mortgage are protected from inflation, at least for the cost of housing. Even more – inflation helps them by reducing the value of monthly mortgage payments. Historically, real estate prices have outpaced inflation almost every year, with an average annual rate of between 4% and 5%. In addition, you have almost complete control over this asset, and if the local currency depreciates drastically, you can sell it in another, more stable one.

Real estate investment through the stock markets

There is another opportunity for real estate investment, which can also have its advantages over the physical purchase of the real estate. This is an investment in real estate through the stock markets. You can make a similar type of investment in real estate by buying: shares of real estate companies; exchange-traded funds (ETFs) investing in real estate; real estate investment trusts (REITs); crowdfunding of real estate.

Gold

Gold has always been respected throughout the world for its rarity, value and rich history. Compared to paper currency, coins, or other types of assets, gold has retained its value over the years and people use it as a way to pass on their wealth from one generation to another.

Investing in gold is very often used to protect against inflation. As the value of a currency declines, people begin to lose confidence in it and look for other ways to store their capital, with gold being one of the first on the list. In addition, the precious metal rises in price due to geopolitical or economic uncertainty, low interest rates, and a weak US dollar.

The main opportunities to invest in gold are investment gold (physical purchase); gold futures; contracts for difference (CFD) of gold; shares of gold mining companies; exchange-traded funds (ETFs) investing in gold.

TIPS (Treasury Inflation-Protected Securities)

Physical or “real” assets are not the only way to protect ourselves from devaluing our savings. The US government issues special instruments that are indexed to inflation in the US and are essentially bonds. But unlike them, the principal changes to reflect the rise in consumer prices, and profitability remains fixed.

TIPS are issued for a period of 5, 10, or 30 years and are low-risk assets, respectively yields. As the direct purchase of these instruments by Americans is almost impossible, they can be acquired through exchange-traded funds on a European exchange. Despite the positive aspects of this type of bond, they have one major drawback – in negative inflation (deflation), the principal is reduced and becomes below par. With TIPS you will not get rich, but at least you will save your savings in a period of rising prices.

Cryptocurrencies

It has recently been suggested that some cryptocurrencies, such as bitcoin, can protect you from inflation. Cryptocurrencies have several advantages over government fiat currencies (those that are not backed by gold or other real commodities). Governments that want to manage their debt by printing more money cannot manipulate cryptocurrencies. Instead, the money supply of cryptocurrencies depends on their own logic.

The problem with cryptocurrencies is that their basic value is not clear. There is some inherent value in an anonymous currency that is not controlled by any government. In addition, at the moment no one knows how cryptocurrencies will behave in high inflation because they have not yet experienced such. Their high volatility and the fact that they are not currently used for their main purpose – payments, makes cryptocurrencies more speculation than investment.



Related article: Investing in property tips

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