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This is a warning. Your wallet is leaking. And perhaps you’re just not aware. Or even worse – you noticed it but didn’t do a thing.
What am I babbling about?
Inflation – the money disease.
I know this might be a difficult subject to conquer. But every RIIQ (Raising InvestorIQ) reader deserves more from life. So, let me show you how to beat inflation.
First, let’s talk about…
The Everyday Life
If you’re reading this, I’m assuming you have a normal job. Something stable that ensures the bills are paid. Now, let me ask you this.
What would you do if your salary got smaller year after year?
Because that’s happening right before your eyes. Unless you get a raise every year...which is rare. Now, let me tell you why your salary is shrinking, even if you do get a raise every year.
You know how you used to get a soda for a dollar, and now it's more like two bucks? That's inflation.
It's like your money doesn't have the same buying power as before. And there was a really big change last year. I hope you got a 10% raise. Because if you did not…well, you are being paid less. According to U.S. Labor Dept data, the annual inflation rate for the U.S. is 8.2% for the 12 months ended Sept 2022! And inflation was 7.0% in 2021. That means the cost of everything is rising significantly!
I won’t go into the details of why inflation occurs or why some consider it healthy. For this article, it’s enough for you to know, it exists. Now that we’ve established you’re losing buying power all the time, let me tell you how to avoid that.
You Have 3 Options
If you made it this far, I’ll assume your financial well-being is important to you.
To maintain wealth and actual purchasing power, you therefore need to steer money into investment vehicles which will at least keep pace with the effects of inflation. On the other hand, if you want to increase wealth and actual purchasing power, you need investment vehicles which hold your money to earn rates of return which exceed the effects of inflation and taxation.
So, how do we preserve our wealth and protect it from inflation? Buy appreciating assets.
Every invested dollar is your soldier in combat against inflation. And all big battles start with a plan.
You have 3 options:
A: Ignore inflation (not recommended)
B: Keep pace with inflation
C: Beat inflation
Let’s look at Option B first.
The Bare Minimum
If your goal is to simply keep pace with inflation, then you shouldn’t risk much. Look for a 2-3% annual return, which (under normal circumstances) should sustain your
Here are a few options:
Treasury Inflation-Protected Securities (TIPS): These bonds are specifically designed to protect against inflation. They adjust with changes in the Consumer Price Index (CPI), providing a return that typically outpaces inflation.
High-Yield Savings Accounts or CDs: Although rates may vary, these accounts offer a low-risk option with relatively stable returns slightly above inflation rates. Look for institutions offering higher interest rates.
Municipal Bonds: Issued by local governments, these bonds offer steady income and are
relatively low risk. Some municipal bonds are structured to protect against inflation.
Annuities: Fixed annuities can provide a guaranteed payout, protecting your principal and
offering a consistent return that might match or slightly exceed inflation rates.
On the other hand, if you’re looking to beat inflation, I have just the thing.
Five Investments to Beat Inflation
Risk and potential return have a positive relationship. So the more return you seek, the more risk you’re inherently taking on. And now that we’re beating inflation, we need the heavy artillery.
Here are a few options:
Stock Market Index Funds: Invest in diversified index funds or ETFs tracking major indices like the S&P 500. Stocks historically have offered higher returns, although they come with greater volatility.
Real Estate Investment Trusts (REITs): These allow investment in real estate without direct property ownership. REITs typically pay high dividends and have potential for capital appreciation.
High-Yield Corporate Bonds: Bonds issued by companies with lower credit ratings offer higher interest rates. They come with higher risk of default, but they often yield higher returns.
Physical Real Estate Investments: Directly owning properties for rental income or capital appreciation. Real estate investments can provide stable returns but require management and can be less liquid compared to other investments.
Individual Stocks: Investing in specific companies that show growth potential or have strong fundamentals may offer higher returns, although it involves higher risk compared to diversified funds.
According to Smart Assets, the top 6 investments to beat inflation include equities (stocks), real estate, commodities (non-gold), TIPS, bonds, and gold (as a hedge against inflation).
The reality of inflation (and taxes) translates to a real reduction in purchasing power! To stay ahead of the game, we need to put our excess cash flow into investments that will allow us to beat inflation and move towards true wealth creation.
Saving just isn't enough. It's imperative to not only save but also to invest those savings in vehicles that at least beat the rate of inflation (and the effects of taxation).
Browse through other articles on this website to gain a better understanding of investing and how to approach effective investment analysis. It is the aim of Raising InvestorIQ to help you improve investing knowhow with relevant info, insight, and analysis so that you can begin to let your money work for you! While we don't offer specific advice or official investment recommendations, we do provide many of the pieces for you to put the puzzle together for an effective investment strategy given your risk tolerance.
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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.