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June 14, 2019

3 Ways to Protect Yourself from the Impact of Inflation

You have probably heard your grandfather tell the story about how gas used to cost 50 cents a gallon, and he could get a Hershey bar for a nickel. Heck, you might have also noticed how the sugary treats you spent your allowance money on back in the day are now a lot more expensive when you buy them for your kids.
The main culprit behind this rise in prices over the years is inflation. Inflation is defined as the rate at which a price rises, and how much a dollar is worth at any point in time in regards to its buying power. The federal government sets an annual inflation target of about 2 percent; so if you pay $3 for your favorite loaf of bread at the store today, you will probably pay about $3.06 by this time next year. It is interesting to note that inflation can vary from product to product—for example, gas typically rises in price as summer gets closer, but clothing and other commodities don't go up as dramatically.
While you really can’t avoid inflation, there are definitely tangible tips you can take to protect your family against what is often referred to as the “worst tax.” Here's how:

1. Consider Stocks Over Bonds in Your Portfolio

Moving from a lot of bonds in your financial portfolio to stocks can offer great protection from future inflation. For instance, stocks will pay a dividend while bonds usually give you a fixed amount. So if you invest in bonds, your cash flow will not increase, but stocks will allow you to boost your income through dividends. Also, over time, the stock market tends to grow faster and provide a better income for investors. It’s important to note that choosing one stock is not the best approach; instead, work with your financial advisor to have a broad and diverse portfolio with a number of stocks, and you should be able to maintain both your purchasing power as well as your standard of living.

2. Look Into Passive Income and Side Hustles

Another way to protect your family from inflation is by looking for opportunities to boost your income. If you have more money coming in, you will be able to still pay for what you are used to buying, even if those costs go up. Passive income is a great option that requires little to no effort on your part to earn money. For instance, if you have a spare car that sits in the garage most of the time, consider renting it out through a company. 
Using credit cards that offer cash back rewards is another effective passive income approach—as long as you pay off your balances in full every month, you can often earn 1.5 percent in “free money” from your purchases. You can also look into side gigs that you do in your free time to increase your income a bit. For instance, if you have a knack for sales and love the idea of having your own home-based business, making money with Amway is an excellent option. Other side hustle ideas include working for a meal delivery service like Grubhub or Uber Eats, or tutoring neighborhood kids in math and English.

3. Invest in Real Estate

If you are able to swing it financially, investing in real estate is an effective way to take advantage of rising prices. Inflation will increase the resale value of properties over time, and it can also be used to bring in rental income. Work with a local real estate agent who is well-versed in rental properties and try to find a home you can purchase; the rental income can help to pay the mortgage and, when you go to sell the property in the future, it will have gone up in price and you will keep the difference.

Don't Let Inflation Get You Down

Inflation is really not something that we can control—it is going to happen no matter how much we wish prices would stay steady. But by being mindful of your portfolio and adding to your income passively, you should be able to sail through any increases in prices without having to change your lifestyle.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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