We’ve all heard the word “inflation” thrown in conversations here and there. Chances are, we’ve also used it several times when talking to people about life, business, work, and cost of living. But perhaps not all of us clearly understand what it is, so allow us to define it in the simplest way possible.
Inflation is an economic term used to describe how the value of money decreases over time. It is generally reflected in the price increase of goods and services in an economy. For instance, the value of a $1 bill in the 1990s is about $2 in today’s economy. This means that if you bought a product for a dollar back in the early ‘90s, the same product would cost you a couple of bucks today.
Some of you might think that $2 isn’t a big deal. Sure, if you stick to just ones. However, if you start to go into the tens, hundreds, and thousands, that’s huge. Imagine buying a house in 1990 for $80,000. The same property will already have increased in value in 2000, at $120,000. That’s just a ten-year gap. In this instance, the dollar’s value was significantly decreased by about a third in just ten years.
The same thing applies to everything that we’re paying for. Food, fuel, education, transportation, interests on personal loans, and other types of goods and services. As the years go by, a fraction is shaved off of the spending power of our money.
But it doesn’t just affect the spending power of money. Even in a low-inflation economy where the rates hit only 5%, that’s still $0,05 less for your dollar for the following year. For low-interest bank accounts, this can be crippling because the interest that the account holders are paying for gets eaten up by the dollar’s decline in value.
For investors, this means that fixed-rate investment returns or interests will lose real money during inflation. This is especially tough for investors who are in it for profit.
Investments that Will Increase Your Chances of Beating Inflation
The reality is there is almost nothing we can do to stop inflation from taking place. At best, we can help protect our finances and make it as inflation-resilient as possible by choosing the right avenues to put money in. Not all investments are made equal, after all. Some investments do particularly well, even amid inflation. Here are some of them:
Historically — although there are no guarantees — stock returns have been proven to beat inflation, especially in the long term. Keep in mind that inflation brings about an increase in the prices of goods and services. And companies are at the receiving end, which means the price increase also increases their bottom lines. This, in turn, increases share profits.
If you’re looking for the best way to get into stocks, consider getting into passive index investment. But don’t take our word for it. Do your research and talk to those who know better so you can make a wise decision.
As prices on goods and services increase, so does the value of real estate. It is a type of asset that appreciates over time. It may require a large of money to get into, but if you’re not financially able to invest in a real estate property, you can still be a part of the action by putting your money in REITs (real estate investment trusts).
Commodities, such as natural resources, raw materials, and crops, also offer great returns during inflation. Precious metals like gold and silver, in particular, have been known as excellent inflation hedges for a long time now, so you might want to look into that. Other types of commodities that give good returns are oil, gas, and other energy commodities.
A somewhat unconventional investment option that works well as an inflation hedge is alternative investments. These tangible assets are quite valuable to collectors, even if the prices can be a bit harder to predict. These include vintage cars, fine art, jewelry, antiques, and other similar collectibles.
When choosing the right investment vehicle, you need to be clear with your goals first. Knowing your goal will help you determine the direction you should go. You also need to consider the severity of the inflation as each investment performs differently during different inflation levels.
Perform your due diligence and consult with the right people before you make any final decisions. It is your hard-earned money that’s on the line.