Inflation affects money by decreasing its buying power. If inflation is at a rate of five percent per year, then your money will be able to buy 95% of what it could last year with that amount of money.
Why Is It Important to Protect Your Money Against Inflation?
If inflation is high, then it’s important that you’re able to maintain the same purchasing power for your salary and also be able to invest enough of it so inflation doesn’t eat away at any earnings from interest on these investments.
One of the most popular inflation-proof asset classes to invest is intangible assets like gold and silver. These metals cannot be printed by a government, they don’t rot over time, and they retain their value much more easily than other investments which can quickly lose their worth with inflation.
Another inflation hedge investment as inflation rises is in commodities. Commodities are essentially raw materials that have future value, so they will often rise when inflation occurs because the cost of production increases while simultaneously decreasing their supply.
60/40 is a well-known investment mix that includes 60% stocks and 40% bonds. It reduces inflation risk by including both inflation hedging assets like precious metals, commodities, etc. as well as treasury bonds which are often inflation-protected themselves.
Real Estate Investment Trusts are a type of security that holds investments in real estate property. They can be publicly traded on stock exchanges and will often pay dividends as well as offer inflation-protected rental income from tenants who have to continue paying rent even if inflation occurs because it’s the cost of doing business for them.