From our discussions on Inflation so far, you can see that it is difficult to classify Inflation as either good or bad. When it is bad for some people, it is good for others.
There are various monetary policies that Governments and Central Banks around the world formulate and enforce in a bit to control inflation and prevent the extremes of deflation or hyperinflation which are very bad for the economy.
These policies include increasing the interest rate, slowing or stopping the growth of the money supply, and reducing the money supply, fixed exchange rate, and wages/price controls
In recent years, most developed countries have attempted to sustain an inflation rate of 2-3% by using monetary policy tools put to use by central banks.
This means that no matter what happens, you cannot completely eliminate inflation nor it’s negative effects instead you work to control it.
Based on the scope of our study, we are not going to go into the details of how the Government controls inflation in the macroeconomic level, rather we are going to focus on how you as the individual can take advantage of inflation by staying ahead of it and reducing or eliminating its negative impact on your personal finance.
How to Stay Ahead of Inflation
?1. Never use Savings as your primary investment vehicle.
As you have learnt already from earlier series, Inflation is the “silent assassin of savings”. Especially when the inflation rate is higher than the interest rate on your saving.
Inflation represents a hike in the cost of everyday living and the higher it rises, the less your cash savings in the bank will be ultimately worth.
?2. Multiply your sources of income and earn more than the rate of inflation.
Warren Buffet is credited for saying that the average millionaire has seven sources of income
You can never be a victim of inflation if you have at least 3 more sources of income that earn you more than your monthly cost of living.
That is why I always advise employees and Entrepreneurs alike to diversify their sources of income and not rely on a fixed or scaled system of payment that fails to adjust for inflation.
?3. Invest more in assets that yield profitable returns.
When talking about multiplying your sources of income, I don’t necessarily mean taking 4 different jobs and working your ass off.
A good way to earn more is through Investment. You can invest in Paper assets (stocks, shares, bonds, mutual funds, etc.), small business, real estate or commodities (oil, gold, silver, etc.)
In as much as your investments continue to yield returns that are enough to cater for your cost of living, you will be way ahead of Inflation.
Note warning tho, don’t just jump into any investment without studying and understanding it.
?4. Invest in Funds that Hedge against inflation.
Invest in Equities, Equities Mutual Funds, inflation-indexed bonds (IIB) and dividend-paying stocks. Equity assets that are positively correlated with inflation keep you on top of the game.
Dividends are a tangible return paid by companies and keep up with inflation because as inflation increases, companies tend to prices which reduces the negative effect of the inflation.
However, these are long-term investment media that you need to study very well before going into them.
In conclusion, the surest way to control inflation is to gain absolute control of your personal finance and your sources of income using the steps outlined above. Don’t expect the Government to do that for you.
This brings us to the end of our FINTEL series on inflation.
I want to believe you have been impacted by these 5 series and you have upgraded your knowledge on what Inflation is all about.
If you have any question or contribution, the Comments thread is all yours.