Inflation is a general increase in the price of services and goods within a country’s economy. Inflation means you get less for your money than you would have done previously. It’s measured as a percentage, with the rate set by the government.
High inflation can lead to a weak currency and impact your own finances. It can reduce the value of any investments and affect factors such as mortgage repayments and savings. So how can you protect your cash from the effects of inflation?
While you can’t avoid some of the negative impacts of high inflation, there are a few factors to consider:
Pay off any loans and debts
Because interest rates rise when inflation increases, it makes sense to pay off any outstanding loans. If you have multiple, it’s wise to pay off the ones with the higher interest first, before tackling the rest. If you’re struggling with a rise in expenses and you’re unable to make a plan to pay off your debts, it’s a good idea to seek professional advice.
Savings accounts
In times of high inflation, it’s worth looking around to see which savings accounts offer the best rates for your money. Many cash accounts have interest rates that are lower than the rate of inflation, which means saving money in the long-term won’t pay off. However, some provide better rates than others, especially if you’re a new customer.
Commodities
In an otherwise weak economy, there are some assets that perform well. Commodities such as gold have historically held their value, even in volatile markets. Gold is often referred to as a ‘safe haven’ asset and typically attracts investors during bear markets. Oil is another popular commodity to invest in and, depending on natural gas prices, can offer a way to beat inflation.
Investing some money into commodities rather than having it all in savings, can provide a greater long-term return.
Indices
Investing in stocks is another way to protect your money from inflation. Depending on the market direction and the type of stock you wish to invest in, you might choose to place your money into one or more indices.
Indices track the values of a basket of stocks, such as the S&P 500 or the NASDAQ-100 Technology Sector. If you choose to use this method if investing, it’s a good idea to spread out your capital across a variety of industries to reduce risk. For example, opt for an index which tracks companies from various industries or select more than one index to cover different sized companies.
Of course, however you decide to offset inflation, you’ll need to ensure you budget properly before setting money aside for savings or investments. It’s also important to know that stock values can go up or down for multiple reasons and not just because of inflation.
