7 Tips for Protecting Your Finances From Inflation

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Is this just a passing period or is it here to stay? That’s the question facing American consumers, who are seeing a decline in their purchasing power amid the highest inflation rates in 30 years.

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There are steps you can take to protect your finances, no matter what happens. Consider buying equities like bank stocks or consumer goods companies that perform well in periods of inflation. Don’t pay off that mortgage early—if we really are in an era of rapidly rising prices and wages, you’re better off paying it off over time with watered-down dollars. Beware of bindings. If rates rise sharply, their original value will be affected.

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Economists are divided on how long high inflation will last. Some argue that supply-chain issues due to the Covid-19 pandemic are temporarily driving up prices, while others say rising labor costs will result in prices rising for years.

“It’s clearly the million dollar question right now,” said Brian Pinsky, president of individual retirement at AIG Life & Retirement. “There are definitely two camps out there, and there are things going on in the economy that will tilt you to one side or the other.”

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According to the Labor Department, the Consumer Price Index, which tracks prices for a wide range of products such as gasoline, healthcare and groceries, rose 6.2% in October from the same month in 2020, the biggest spike since December 1990. .

Bruce Bruegler, managing director of Tiedman Advisors, said that in an inflationary environment, “cash is garbage” as the dollar loses value over time. The problem is that the stock market and real estate have risen sharply in recent months, so investors will have to discriminate more to find value.

Still, advisers say there are ways for savers to adjust their investment and personal-finance strategies to maintain their purchasing power. Here are seven tips for living in a period of inflation.

Identify stocks that would benefit from higher inflation or higher interest rates. Investment advisor Brian Stivers says banking, consumer staples, energy, utility and healthcare equities are likely to do well.

Banks will come forward if the Federal Reserve eventually raises interest rates to combat inflation, and spreads between banks’ loans and deposits. Meanwhile, companies that produce essential consumer goods are generally able to pass their higher costs on to consumers.

Conversely, automotive and housing companies will be troubled by rising interest rates that increase the cost of borrowing for customers. This makes them a risky investment right now.

“I’m a big fan of times like these in sector investing, and this can be done in individual stocks or with exchange-traded funds,” Stivers said.

Rob Williams, managing director of financial planning and retirement income at the Schwab Center for Financial Research, said international stocks will appeal to investors who are concerned that the dollar will weaken from inflation.

Avoid fixed income. If rates rise, certificates of deposit, fixed annuities, bonds and bond funds purchased today will look less attractive in the future.

“If the Fed raises rates, I would be wary about buying any new bonds and probably wait until rates start going up,” Stivers said. “However, there are still some long-term bonds where people are getting yields of 3% or 4%, and you want to hold onto those.”

Similarly, buying a lifetime income annuity is less attractive in an inflationary environment. The monthly check you receive for the rest of your life will lose value more quickly with higher inflation.

AIG Life & Retirement’s Pinsky said investors are choosing shorter-term fixed annuities and equity-indexed annuities, which are tied to the performance of a stock index like the S&P 500.,
He said equity-indexed annuities offer prime protection for investors with low risk tolerance.

Treasury inflation-protected securities, or TIPS, are another option for savers seeking a low-risk investment, according to Matt Nadeau of Piershall Financial Group. With TIPS, the principal increases with inflation as measured by the CPI.

Have the right kind of loan. Homeowners who have a term mortgage with low interest rates are sitting very well. If you haven’t done so already, it’s a good idea to refinance to lock in lower rates. If inflation rises, home prices are likely to climb and your fixed monthly payment may look like a real deal in a few years.

Credit-card debt, on the other hand, is particularly bad in a rising rate environment. This is a floating-rate date, and your monthly payment will increase.

Consider objects. Matt Nadeau of Pearsley Financial Group said investments in oil, natural gas, wheat and corn can be good hedges against inflation.

He added that ETFs such as the Flexshare Morningstar Global Upstream Natural Resources Index Fund (ticker: GUNR) and the SPDR S&P Global Natural Resources ETF (GNR) give investors “broad-based opportunities” to take advantage of rising commodity prices, including energy. Precious metals and agriculture.

Look for companies that benefit from rising labor costs. Bruegler of Tiedemann Advisors said energy-services companies and technology companies aimed at reducing the labor needs of businesses due to high inflation rates could be interesting investments.

As an example, he pointed to Toast (ticker: TOST), a cloud-based software company that provides restaurant-management and point-of-sale systems built on the Android operating system. As restaurants struggle to recruit and retain workers and are forced to raise wages, technology companies aimed at reducing head count should benefit, Bruegler said.

“Think about the sources of inflation, and then identify which companies are helping other companies ease that cost pain by providing solutions,” he said.

Pull the trigger on essential purchases and charitable donations. According to Bruegler of Tiedman Advisors, if consumers expect to spend money on home goods, renovations, car repairs, or other products and services before prices climb even higher, they may be better off doing so now. .

Charities may also face higher prices for goods and services in the future.

“To the extent that you want your charitable dollar to gain something, putting it in the hands of that charity also makes sense now,” he said. “A $1,000 gift many years from today is worth more than a $1,000 gift to that charity.”

Brace for rising healthcare costs. Health costs have risen faster than inflation over the years. The pandemic, which is driving some health professionals off the field, could accelerate that trend.

Stivers, of Stivers Financial Services, recommends increasing contributions to health savings accounts, if possible. Workers enrolled in high-deductible health insurance plans are usually eligible for HSAs, which allow savers to set aside money on a pretax basis to pay for qualified medical expenses. Investment gains within an HSA are not taxed.

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