Long before inflation strikes you, you should prepare yourself with the ways in which you can stop inflation from hurting your wealth. One of the biggest risks of long term investing is inflation along with taxes, costs and volatility scaring you out of the market. Investment experts often consider equities as the best form of long-term investment and this is only due to inflation. Bonds and cash can at times seem more likely to earn higher income by incurring a very less risk. However, history shows that equities always perform better through many decades and hence they are a better defense against the harsh consequences of inflation.
But what if you wish to take short-term action against inflation and prevent it from hurting your wealth? What steps would you require taking if you are eager to balance your portfolio towards that direction? One of the options to go for are equities. What are the other ways? Here are few ways of beating inflation.
Higher rates of interest
In case you’re someone who is making 2% on the cash savings and you see that inflation is running down your selected measure at 3%, then as per real terms, you will actually lose 1% a year, despite the fact that the balance in your account will be moving up. Do you know why? Well, it is because the power of your cash to spend will get declined in real-time. If the chosen asset cost you $1000 to buy whatever you wanted to purchase in a year, the following year it will cost you $1030 only because of inflation. At the same time, the growth in your savings will be $1020 which is not at all good. You might also require locking your money either for a year or more than that to earn sufficient amount of savings.
The next thing that you need to consider is whether or not you are best utilizing the tax havens or tax shelters of ISAs to safeguard your cash savings or the equities. You should definitely be doing one or the other. If you’ve been getting a 2% return on cash, it will soon become 1.7% return post deduction of taxes and it may even become 1.2% if you pay a rate of 40%. Such tax reductions make it tougher to beat the impacts of inflation. Unless you seem to have utilized all the shelters, don’t endure them.
National Savings certificates
If you have been safeguarding your money from simple inflation with the help of a 100% federal backed guarantee, then choosing National Savings certificates are probably the best options. They are bonds which are issues for the mass by the Treasury Department through its arm called National Savings and Investment. These certificates come in 3 and 5 year types but you can cash them out any time and they can guarantee you return more than RPI inflation. Don’t forget that the return is tax-free.
Therefore, if you’re eager to save your wealth against the upshots of inflation, you can take the above mentioned steps that are listed.