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Hedge Your Nest Egg Against the Uncertainty of Inflation

Inflation in America has reached a five-year high. January 2017, saw monthly inflation of 0.6% according to the the U.S. Consumer Price Index. That may not sound like much, but if we had 11 more months like it we would have 7.2% annual inflation. While that is not likely, January’s increase has made the annual inflation rate jump to 2.5 percent, the highest since the FED’s massive money flood called QE2 (Quantitative Easing) in 2011.

hedge inflationPrice inflation, in economic terms, means that prices of goods and services are rising. For example, suppose a bottle of shampoo costs you a dollar today and $1.25 a year from now, that would mean that inflation has risen by 25%.

For most households inflation means higher expenses. If the family’s income remains the same while other prices go up, the rising inflation will put a strain on your family’s  budget. You will be able to buy less for the same amount of money you make. Unfortunately, long-term inflation also takes a toll on the value of your nest egg (i.e. any savings and retirement funds you have). Therefore, it’s important to anticipate inflationary periods and take the necessary steps to protect both your long-term and short-term family finances. Here is a list of some of the steps you can take:

Increase Overall Income

One of the best ways to reduce the brunt of inflation in the short term is to increase overall income. Some households in America are already experiencing rising wages thanks to policy changes. These households will not feel the rise in prices as badly as households where income remains stagnant. So, if your wages are not naturally rising, you must take steps to increase your income. You can consider taking on a second job or working from home on a freelance basis. You can also aim for a promotion at work or ask for a raise. Of course, improving your skills will also make you more valuable to your employer as will doing tasks your boss doesn’t like to perform himself.

Add Gold to Your IRA

In the long run however, savings also depreciate during inflationary periods unless your investments offer a higher interest rate than the existing rate of inflation. For example, if the current inflation rate is 2.5 percent, your savings account should have an interest rate of at least 3 percent for your money to actually grow. Unfortunately, currently you will be lucky to get 0.5% interest from a bank. Retirement savings can take a hit during inflationary periods. This doesn’t mean you should stop saving. What you need to do is protect your assets against inflation. Generally, hard assets (physical items) do a good job of holding their value in times of inflation. And by diversifying among paper assets (stocks and bonds), and hard assets like gold, silver and real estate you can even out the fluctuations in the value of your assets.

One way to incorporate hard assets into your holdings is with a gold and silver IRA. Your retirement savings will be protected in case the dollar takes a serious hit. However, there are certain restrictions imposed by the government so you need to become familiar with them first.  You might also want to buy some inflation insurance in the form of physical gold or silver bars and/or coins, in case your paper savings lose value due to inflation.

Invest in Real Estate

Real estate is another hedge against inflation. One advantage of real estate is that it can be made to pay for itself, i.e. your tenants pay the mortgage. Also, property during inflationary times can be sold for higher prices. In addition, unless you have a long term contract or the city imposes “rent control” you can raise the rent in times of inflation. Real estate investments like REITs are “hands off” real estate investments you can buy just like stocks.

Tackling rising prices is not easy. Thinking ahead and planning in advance will definitely help.

Image courtesy of 40 things you can buy for a dollar.

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