4 Ways You Can Protect Yourself Against Inflation

With inflation rates rising to 40-year highs and potentially about to rise even higher, American households are having to deal with the specter of rising inflation. As you might expect, with inflation rates now at levels we haven’t seen in decades, most Americans don’t know how to deal with inflation. Many still believe that this inflation is only transitory. But if it becomes as entrenched as inflation was in the 1970s, failing to protect yourself against it could cost you dearly.

If there’s any good news about this inflation, it’s that it’s not anything other people haven’t dealt with before. Previous generations of Americans have had to deal with high inflation, and they managed to cope, survive, and thrive. People in other countries have had to deal with even higher inflation in the past and even in the present. And we can learn from their example.

If you’re worried about inflation, you’re not alone. But coping with rising inflation is well within your grasp. And here are four ways you can protect yourself against inflation.

1. Minimize Reliance on Cash

Inflation is always and everywhere a monetary phenomenon. And not too infrequently inflation can devolve into hyperinflation. Currency collapse is a real danger during periods of high inflation, threatening those who have large holdings of cash, large bank deposits, or any assets whose value is dependent upon the strength of the national currency.

People who survive inflationary and hyperinflationary regimes often do so by minimizing their reliance on cash. Very often that means eliminating holdings of cash or cash equivalents such as bank accounts, spending paychecks immediately, and taking various steps to minimize their susceptibility to currency devaluation.

Remember that even during a period of “low” 2% annual inflation, prices will rise about 50% over a 20-year period, which is about how long you can expect to live if you retire today at age 65. If 6.8% inflation becomes the norm, that would cause prices to nearly quadruple over 20 years. And if inflation were to rise to 10%, prices would increase nearly sevenfold over 20 years.

That would mean that each dollar you had at retirement would lose 85% of its purchasing power over the course of your retirement. That’s a stark reminder that when inflation rises, holding cash is a guaranteed money loser.

2. Increase Your Income

Another way to combat inflation is to increase your income. Of course, that’s easier said than done.

If you’re still in the workforce, now is the time to get ahead of the curve and ensure that your raises will at least keep up with inflation. A 2% annual raise isn’t going to cut it anymore, and at current rates will mean that you’re taking nearly a 5% pay cut. You just can’t allow that to happen.

If you’re an investor, you’ll have to make smart investing decisions to ensure that your investment income will keep above the inflation rate. 7% inflation is pretty high, right about even with the long-term growth rate of stock markets, so keeping your investment income above those types of inflation rates isn’t going to be easy. But with plenty of research and judicious investing, it can be done.

3. Borrow Strategically

Borrowing money is something that doesn’t come easy to many of us. The idea of being in debt is abhorrent, and rightfully so. Still, most of us end up going into debt at some point, especially when it comes time to buy a house. But in times of high inflation, it could make sense to borrow strategically, as long as you can borrow at rates lower than the inflation rate.

In the housing market today, for instance, mortgage rates are still at around 3.25% for a 30-year fixed rate mortgage. That obviously is well under the current inflation rate. So if inflation becomes entrenched and long-lasting, someone borrowing money to buy a house today could end up coming out ahead, with a real interest rate that is actually negative due to being able to pay off that mortgage in the future with devalued dollars.

Obviously this isn’t something to do willy nilly, and should only be done after you consult with your financial advisor and tax advisor. But this is a tactic that could be used to great effect if you have a good handle on interest rates and a sense for which way they’re going to go. Funding larger purchases by borrowing could end up saving you money in a high inflation environment, but it’s something you’re going to have to really think hard about.

4. Look to Hard Assets

Finally, perhaps the most important way you can protect yourself against inflation is through hard assets. This means physical assets that you can actually touch. This could be land, houses, cars, precious metals like gold and silver, artwork, etc.

It’s important to remember that money isn’t wealth. Money is a means to acquire physical goods that benefit us. But the economics that modern-day central bankers espouse doesn’t understand that. It equates money with wealth. That’s why central bankers create money ad nauseam and ad infinitum, in the belief that more money equals greater wealth. But as we’re witnessing today, it just leads to higher prices and erodes our standard of living.

It’s the actual possessions we own that are our wealth. During the hyperinflation of Weimar Germany in the 1920s, for instance, those who fared the best were often those who had physical assets on which they could fall back. Those who had bank accounts, pensions, and paper money often found themselves destitute, while those who had gold and silver, foreign currencies that could be exchanged for precious metals, or even physical goods like clothing, furniture, and cookware, could purchase goods or barter for what they needed.

It’s an important reminder that, while stocks and bonds may have served many investors well for decades, the new era of inflation into which we are entering makes portfolio diversification that much more important. And one of the best ways to diversify your portfolio is through physical assets, including gold and silver.

Not only are gold and silver physical assets that can’t be devalued in the same way that paper money can be, they also have a track record of gaining value during times of high inflation. During the 1970s, for instance, gold and silver’s average annualized gains were over 30% over the course of the decade. If the 2020s end up being a decade of stagflation like the 1970s, and if gold and silver repeat that type of performance, owners of gold and silver could end up being very pleased with their decision to buy gold and silver.

No matter which way you end up protecting yourself against inflation, it’s imperative that you make some sort of effort. Inflation isn’t something you can protect yourself against without being proactive. Allowing yourself to lose money every year when you could be taking concrete steps to protect yourself is a recipe for disaster.

Don’t let your hard-earned savings be all for naught. Protect yourself against inflation today.

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