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What is the best way to protect yourself from inflation

What is the best way to protect yourself from inflation

What is the best way to protect yourself from inflation?

U.S.A inflation is currently running at 7.5 according to the latest data and may still go higher and I know that a lot of people are worrying about how to protect their money from inflation perhaps your side hustle of selling your used underwear on ebay isn't going too well 

So let's look at some ways to protect your cash from inflation eating away its value but first of all, if you don't know the exact definition of inflation what exactly is it 

It is the decline of purchasing power of a given currency over time so if u.s inflation is running at 7.5 percent and you have say a hundred dollars and you wait until next year or next year that 100 would only be able to buy you the same amount of stuff as 92.50 

Would have done this year so with bank interest rates currently at pitiful levels how are you going to protect your money from inflation 

Number one series I savings bonds 

Bonda are bonds from the us treasury that are directly linked to the rate of inflation and they earn interest in two ways a fixed rate that stays for the lifetime of the bond and an inflation rate that is adjusted twice a year 

now currently the bond yield is 7.12 which according to the latest month's figures is slightly below the inflation rate 

however, if you go by the previous month's data it would be slightly above okay and the bonds will be adjusted in April and generally, they do sit at or slightly above the inflation rate 

now you may just think why not just put all my money into eye bonds well you're only allowed to buy ten thousand dollars worth of them per year through the government's treasury direct website 

however, the bonds will continue to earn interest for 30 years and you can build up a big stash of them by buying thousands of dollars worth of them per year 

you can cash them out after one year but if you cash them out before five years you lose the previous three months' interest 

I bonds are subject to federal income tax on the earnings however if you use the proceeds to pay for your education you may be able to avoid federal taxes 

Number two earning interest on stable coins

 now this one involves converting your us dollars to cryptocurrency and then staking those coins for an interest yield just like earning interest in a bank account if bank accounts actually paid any interest 

but wait a minute aren't cryptocurrencies highly volatile what if they lose value well in this example we're going to mostly be looking at stable coins that are pegged one-to-one with us dollar 

for example, you can earn interest on usdt or tether which is one of the most common stable coins using the new lending network on an ape swap this was just launched you can earn over 12 annual returns on tether in the form of banana tokens their native token 

you can then cash out the banana tokens immediately or you can hold them and see if they increase in value if you want a higher interest rate you can look into finance coin or bmb coin which does fluctuate in value but it is the number four cryptocurrency by market cap right behind bitcoin Ethereum and tether 

so it's not some dog meme coin that's gonna crash to zero and you can earn a whopping 18 interest on that beating inflation by two and a half times and the coin may rise in value in addition to that 

Number three dividend stocks

Inflation hurts high growth and tech stocks like the fangs and tesla the Nasdaq was at a six-month low at the end of January and is still flirting with those levels now 

so why does inflation hurt high growth stocks well as the cost of just general items rises the company's expenses will rise then the fed raises rates to fight inflation and that causes the cost of borrowing money to become more expensive 

which further hurts the company's profits and then as rates rise bonds and other savings accounts and things just start to become a little bit more enticing to investors and some investors go and invest there instead of in these high growth stocks and that can slump the stock price even more 

but dividend stocks have been somewhat of a safe haven in times of market downturns and high inflation dividends have actually accounted for 40 percent of the market returns since 1930 and in times of high inflation such as in the 1970s dividends actually accounted for 71 percent of the market return during that period 

now what is more analysts predict that many companies that cut their dividends in the year 2020 in reaction to the pandemic will reinstate them this year now in normal times i would recommend looking at the dividend aristocrats 

These are companies in the s p 500 that have paid and increased their dividends every year for the past 25 years 

but since inflation is so high right now many of them do not have dividends at a level where they could beat inflation so you may want to look outside of the aristocrats however it does come with a little more risk 

It's a great time to invest in dividend-paying stocks of companies that are related to things that would hurt if you drop them on your foot like rocks a barrel of oil building materials etc 

The great thing about dividends too is that if you buy now as the price of the stock and the dividend rises in the future the percentage yield that you are getting is always measured in relation to the price that you paid in the first place 

So nine percent now could equal 15 a few years down the line just a word of warning though high dividends can be a signal that a company is in financial trouble it may have experienced a sudden stop price drop and it's going to cut its dividend in the future so if you see dividends in the sort of 15 range that's normally too good to be true territory

Even 10 you do want to do your own research i think sort of the high single digits is really going to be as high as you want to go perhaps around 10 for certain companies 

Number four gold and precious metals 

now traditionally gold and other precious metals are seen as a hedge against inflation however this idea has been challenged in recent decades and actually gold hasn't produced a positive return during periods of prolonged inflation since the 1970s 

Actually in the past year as inflation has risen gold has ever so slightly decreased in price in the last couple of decades bitcoin which is often referred to as digital gold has taken a lot of that inflation hedging business away from gold and you've got real estate investment trusts too 

But i would still say holding a little bit of gold in your portfolio even if it is through exposure to gold miners like through an etf such as gdxj is a good idea you can also buy small amounts of physical gold and silver etc 

But you'll need somewhere to store them for me gold is not so much a hedge against inflation but a hedge against a sort of mad max type situation i guess water and bullets would be a good hedge against that too and thus it only occupies a small portion of my portfolio right

Number five long-term debt now inflation actually benefits holders of long-term debt like people with mortgages since over time their mortgage payment will stay exactly the same as long as they've got a fixed rate and most people these days have whilst their income at least in theory should rise with inflation to give an example 

let's say a person's mortgage payment is one thousand five hundred dollars a month and he earns five thousand dollars a month that's thirty percent of his salary 

but if because of inflation over the course of a couple of years his pay rises to 5 500 a month well his mortgage payment won't change as long as he has a fixed rate so his mortgage payment has now decreased to only 27 percent of his monthly income whilst 

the guy renting next door has had his rent raised by the landlord perhaps in ten years' time our guy is now earning seven thousand dollars a month because of inflation and wages rising etc

But his mortgage payment is still just one thousand five hundred dollars it's now only 21 of his income 

so arguably right now it's an excellent time to buy a house from this point of view because interest rates are still low and inflation is high but that's only part of the picture since huge demand in some markets and a shortage of materials have driven prices up but often getting a lower interest rate is still a better deal even if you pay a bit more for the property

For example, if you increase your rate from 3.5 to 4.5 percent on a 350 000 house you'll pay over 60 000 more in interest over 30 years 

So you definitely need to do your own research on this and it'll be heavily influenced by what housing market you're buying in etc but at least in principle inflation does benefit holders of long-term debt.

Also read: Different types of financial independence retire early

Also read: How To Withdraw PF Or Transfer PF From Exempted Trust?



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