7 Timeless Ways to Protect Your Finances Against Inflation

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High inflation is here and it doesn’t seem to be going away anytime soon, so we need to step carefully. It is now no surprise to find higher price tags on food products, and many other everyday goods and services. For most of us, inflation has completely run away taking with it our purchasing power and peace of mind. Jeopardizing our financial health, and erasing our hopes for the future.

The government statistics on inflation don’t quite capture the reality of the effects of inflation. They are just numbers after all, not the real faces of those that grapple with it. In the long run, the year-on-year increase will have us see the cost of living actually double more than once. In other words, if a standard of living used to cost Ksh. 100,000, it can cost Ksh. 200,000 or more by the time you enter into your retirement.

All isn’t lost, here are some tried and test ways to tackle your current financial squeeze:

1. Inflation-Friendly Fixed-Income Securities

Treasury bonds are issued by the Kenyan government and some are designed to keep pace with inflation. In practice, the price of these bonds increases with inflation, so they don’t lose their purchasing power. While the fixed interest rate stays the same over the duration of the bond, the value to which it is applied would increase in an inflationary environment. They can be purchased directly through Central Bank. At maturity, the principal amount of the bond is guaranteed by the government.

Alternative, since we do not want to get locked in with low-interest earning fixed-income securities for the long haul, consider focusing on short-term bonds. By focusing on shorter-term bonds, you have less exposure to future inflation. Upon maturity of these short-term bonds, you can easily reinvest at better rates, as interest rates rise.

2. Go Aggressive on Bonds

If rates climb, then certificates of deposit, fixed annuities, bonds and bond funds purchased today will be less attractive in the future. Therefore, it’s best to be more careful about buying these securities when interest rates are anticipated to rise in the near future. Acquiring these assets in an inflation environment means that the income accrued will lose value more quickly with high inflation.

Rather than completely shy away from fixed income securities entirely, go aggressive on some types of bonds. Specifically, high yield bonds. They may provide protection against future inflation as opposed to higher-quality bonds. The reason for this is simple; the yield or the income generated by these high yield bonds is greater than that provided by the high-quality bonds. However, there are downsides. These bonds may provide higher income but they come with greater credit risk. Thus, the stability and protection that bonds offer in diversified portfolios, with aggressive growth assets, will diminish with more bond inflation protection.

3. Investing in Stocks

Historically, stocks have been known to outpace inflation and thus, provide a great hedge against inflation. Stocks provide inflation protection in two main ways: dividend payments and growth.

Dividends

As company profits grow over time, so do the dividends paid out. This translates to higher cash flows in the future for you as an investor. Imagine a scenario in which a company is growing their dividends by 7% a year. If your dividend starts at a Ksh. 1,000,000 investment, it provides a Ksh. 30,000 a year income. Then over a course of a decade, you’ve effectively doubled your cash flow at 7% yearly dividend growth to have Ksh. 60,000 in income. This growth can effectively hedge against inflation or maintain your purchasing power and standard of living; even if inflation is rising.

Growth

Markets in general, tend to move higher over time, thence growth.

If you are able to stash away your money for long periods of time (5 years +), the stock market is a great option for inflation-beating returns. When selecting stocks for your portfolio, consider digging a little deeper. You’ll want to check out stocks that perform best in an inflationary environment. Stocks for consumer staples, energy, utilities, healthcare and building materials typically perform well. However, diversify; a broad-based index is easier, less expensive, more manageable and tends to move higher over time.

4. Investing in Real Estate

If you’ve been paying attention to the real estate market, you may have noticed that property prices have been increasing drastically. Particularly in the last 20 something years. Real estate tends to maintain and increase in value over time. As rents and home values typically tend to increase in inflationary periods. This increase is more or less in line with the rate of inflation, or in some areas, the increase may be greater than the rate of inflation as other factors may have a greater influence on prices in those areas. As a result, real estate is quite a popular option to hedge risk.

Whether you own physical real estate or publicly traded securities, or a real estate investment trust (REIT), the benefits of real estate with those rising cashflows in the future will be felt giving you an inflation hedge if your cost of living commensurately increases.

5. Invest in Commodities

Another way to protect yourself against inflation is through commodities investing. Though a bit tricky, there is a general belief that commodities increase in inflationary environments. Historically, investors have used gold for instance as a hedge against inflation in the long run.

For the everyday investor, commodities can be quite difficult to invest in, as the methods of investing are not readily available. You can invest in commodities through Futures or Exchange-Traded Funds (ETFs) that invest in raw materials and commodities. With futures, they carry a lot of leverage risk and the possibility of total loss. As for ETFs, they do not provide pure exposure as the price movement doesn’t sometimes match the movement of the price of the commodities themselves.

Due to these shortcomings, I think the best way to invest in commodities, is by buying stocks of commodity producers. This way you will be able to take advantage of the inflation hedging protection of commodities. While doing so, also take advantage of owning a company that is actually producing something and hopefully generating profits at the same time.

6. Moderate Debt Exposure

Ensure that you maintain the right sort of debt, such as that with low-interest rates. If inflation takes off, interest rates are likely to rise. In an inflationary environment, great debt is in fixed mortgages with low-interest rates as property prices are likely to climb. This makes the monthly payments more affordable with time. On the other hand, stay clear of credit card debt or forms of short-term debt with floating interest rates. The monthly payments of these forms of debts tend to go up as inflation continues to rise.

7. Follow A Budget

A budget brings focus, especially on the expense categories that inflation might affect such as food, transportation, utilities, education and even healthcare. Having an all-around understanding of your budget, allows you to plan better and stretch your budget further. That is, buying less expensive products and enabling you to consider expenses that you can cut or reduce without affecting your overall quality of life.

While we hate facing price increases, it is best to prepare for it. Since we know that prices of food and other commodities will continue to increase, it will help to mitigate its effects by making big purchases now. For instance, you can take a reasonable amount of debt at low-interest rates now to buy a house if possible. Historically, higher interest rates come with higher inflation. Also, it wouldn’t hurt to prepare your home and your family for cost increases. We cannot control the rise and fall of prices, but we can control our decisions. We can make choices today that will help us manage inflation tomorrow.

Summary

There are many other ways, but these are seven main areas that you can use to protect yourself from inflation.

Protect Yourself Against Inflation By:

  • Approriately invest in inflation-firendly fixed income securities such as inflation protected treasury bonds or short-term bonds.
  • Dip your toes and go a little aggressive on bonds – in a very caustious manner though.
  • Investing in stocks, which over time will offer gorwing dividends and also caputal appreciation to protect against inflation.
  • Invest in commodity producing companies and take advantage of commodity price inflation that passes through in the form of profits.
  • Buy real estate, whether physical real estate or publicly traded securities, and take advantage of rising cashflows.
  • Fixing your budget and any debt to the degree possible to get certainity around your future expenses.

Incorporating these seven steps can help you control your spending, and match any future expense increases with income increases as well. Ultimately, we are seeking more certainty, comfort and peace of mind.

Image credits: Top by Monstera from Pexels

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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