Inflation is a very real economic threat that can cause your money to lose value over time. Everyone was expecting rising prices as life returned to normal after the pandemic, but it appears this situation is less temporary than many were hoping it would be.
With the cost of living rising at a rapid pace, it’s important to keep a level head. To help you during a time like this, I’m going to share four top tips for protecting your money and investments from inflationary pressures. Read on to find out how you can prepare your finances.
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Why does inflation affect your money and investments?
Inflation means things are getting more expensive. When this happens, your pounds can buy less today than they could before.
So, as inflation rises, your cash loses value. When the latest yearly inflation figure is released, a good way to think of it is like this: take the number and put a minus symbol before it. This means that if annual inflation is 5%, you should think of it as a -5% return. That’s because your cash is only able to buy 95% of what it could a year before.
You may think that with low interest rates from even the best bank accounts, the easy solution is to just throw all of your cash into stocks and shares. This is not the case. Inflation can have a widely varied impact on assets. So you really need to think about any potential inflation-beating moves carefully.
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How can you protect yourself against inflation in 2022?
There is always light at the end of the tunnel, and there are measures you can take to try to protect against the evil powers of inflation. Here are four straightforward ideas from Kinesis Money.
1. Be wary of holding too much cash
As I mentioned, cash can be one of the biggest casualties of war in an economic environment of rising prices.
So the first thing you should do is take a look at how much cash you’re sitting on. Have a think about whether you need immediate access to it. It’s always a good idea to keep a decent emergency fund, but anything over that, you should brainstorm different ways to put that money to work.
Your goals will be unique to your situation. But the first step is to see if your money is in danger of suffocation due to inflation.
2. Move cash out of low-interest current accounts
The next step is to start doing something with the at-risk excess money. Even top savings accounts offer interest rates that are nowhere near the rate of inflation. However, getting some kind of return is better than nothing, and it reduces the impact of rising prices.
So, if you’re holding lots of cash in your current account and you don’t need to use that money any time soon, you should consider moving it somewhere paying at least some interest. This could be through a regular savings account, or if you’re able to lock that money away for a period, a fixed-rate bond could be a smart move.
It’s unlikely you’re going to beat inflation with savings accounts, but think of them as damage control tools. The most important thing is to be aware of what’s going on and understand that you’re losing money by taking no action.
3. Invest in gold
You may have heard people banging on about gold recently. This is because gold has played a key role as a global hedge against inflation over the years.
Gold is a finite commodity and operates outside the normal financial system. So, its price movements are not necessarily linked to what’s happening in the rest of the economy and the rising price of loo roll.
Keeping at least a small amount of gold in your portfolio can help steady the ship when waves are crashing all around you.
4. Look into other commodities
Gold isn’t the only commodity that can be a useful hedge. Other precious metals offer interesting opportunities for savvy investors. It’s not just pirates who love silver!
The price movements aren’t always exciting, but over the long-term, they can play a functional part in your investing strategy. You don’t just have to stop at pirate booty either. There are plenty of other commodities out there, such as oil, agricultural produce and industrial metals (like copper).
If you want to invest in these sorts of areas, you can do it directly or by using investment funds. But in order to have access to all of the markets available, you’re going to need a top-rated share dealing account that lets you invest in alternative assets.
