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The world is a buzz with inflationary fears, but as talks of hiking interest rates, permeate Capitol corridors, common people, you and me, have to contend with the pressure of staying alive.
Keeping our businesses alive, having jobs, buying necessities for our families and saving some of the dollars for a rainy day.
The latest consumer-price index report released in June 2022 stipulated a steep rise of inflation rate to a wallet-crushing 9.1%. Central Banks, across the world responding to keep the economy from going rogue try to curb soaring prices through interest rate hikes.
That will offer some relief but the bottom line of dealing with inflation still boils down to individual decisions.
Most Americans have some experience saving, spending, budgeting, and investing – which are important pillars to living in inflationary economy.
And because your survival in a high inflation environment depends on spending sparingly, living on a lean budget and pulling all stops to maneuver through tough times, here are some tips of how you can do that:
Tip 1: Create or update your budget
Having a reasonable budget is one way to beat inflation. An ideal working budget saves 25% to 30% of your income, and builds an emergency fund equivalent to six months of your household’s salary.
A budget ensures that you can keep costs under control and limit spending.
Allocate funds at the beginning of every month, then set budget limits for items easily affected by inflation, e.g. clothes, food, and housing.
Modify your spending habits, resist the urge to dip into your emergency fund or retirement savings.
Make use of cost-cutting measures to impede rising prices. These include canceling subscription services, consulting online price comparison sites before purchasing products, and trading down brand names to cheaper alternatives.
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Tip 2: Pay off existing variable debt
When inflation is high and commodity prices skyrocket, interest rates may spiral out of control. You need to pay off any loan carrying floating or variable rates as they are red flags.
Before thinking of investing prioritize paying off variable debts, like credit cards, lines of credit, personal loans, and variable rate mortgages.
Then set a spending limit on your credit cards. This will help you to:
- avoid overspending.
- reassess your daily expenditures.
- reduce interest paid on your loans.
Tip 3: Prioritize spending
Prioritize spending, remove unnecessary items from your budget and prioritize buying indispensable items.
This will include giving up luxurious activities and expenditures like eating out, gym membership, and working out from home instead, and Saving on gas by carpooling with colleagues.
Lastly when you have money to buy stuff, buy sooner rather than later. For example, if you can afford large purchases like a car or a home, buy now rather than later. That decision will save you cash in the long run.
Tip 4: Look for cheaper alternatives
When prices escalate, you may be forced to dig deeper into your pockets.
Find ways of cutting down costs by comparing different brands. You may discover there isn’t any disparity in quality or taste. Then buy in bulk to save costs.
Explore free fun activities. For example, instead of eating out, invite friends to dinner at your house or host a games night for your colleagues.
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Tip 5: Diversify your Investments
Most investors have a propensity for U.S stocks and bonds. Consider increasing international exposure to hedge against inflation.
Major economies, the UK, Germany, Australia, Japan and South Korea do not rise and fall in tandem with U.S. market indices.
Diversifying your stock holding from these countries will help you to hedge your portfolio against domestic cycles. Additionally, bonds from foreign issuers will provide fixed income that may not drop in price even when inflation hits hard.
If you hold S&P 500 index funds, consider adding an international index fund to your portfolio, consider buying some low cost investments, Exchange-traded funds (ETFs) and mutual funds.
They are a low-cost investment, compared to purchasing American Depositary Receipts (ADRs) or foreign stocks.
Tip 6: Invest in Real Estate
Real Estate has always been a steady inflation hedge even when markets crash. Investing in real estate has intrinsic value and provides consistent income because there will always be demand for homes.
Here is something else, when inflation rises, so do property values, this means increased rent charges.
Consider investing in real estate investment trusts (REITs – Real estate management companies modeled off mutual funds). They often operate commercial, residential, and industrial properties portfolio, they provide income through rents and leases, and often pay higher yields than bonds.
REITS can provide steady dividends to small investors. These are more liquid investments because they can be bought and sold easily in the market.
Another key advantage is that their prices mostly remains unaffected when rates begin to rise, because their operating costs always remain largely unchanged.
Invest in REITS with broad exposure to real estate and a low expense ratio.
The bottom line
Between stimulus checks, meme stocks, and the crypto craze, market peculiarities and opportunities have pushed many Americans to dip their toes in investments over the last couple of years.
However, with inflation on the rise, some of these investments have become unstable.
Turn to tried, true and tested investments to protect your wealth – budget, pay off high interest debts, prioritize spending, look for cheaper alternatives, and invest in safer assets that aren’t tied to inflation.