How to Prepare For Inflation: 8 Expert Tips To Earn & Save More

Based on the Consumer Price Index (CPI) data released by the Federal Reserve, the US inflation rate has risen to 8.4% in March 2022, the highest in nearly 40 years.

High inflation decreases the value of money and can negatively impact your purchasing power. 

Additionally, rising prices of food and higher interest rates on loans slow down economic growth, resulting in an unstable stock market. 

Luckily, with the right investment advice, you can protect the value of your money and potentially earn a better return on investment even in an inflationary environment.

In this article, we’ll explore how inflation affects the money supply and your asset values, and we’ll give you eight expert tips on how to prepare for inflation.  

We'll also show you how to beat inflation by investing in alternative assets like fine wine and how Vinovest can help you with it.

How Does Inflation Affect Your Asset Values?

Based on previous inflation data, you can form more accurate inflation expectations and prepare better during the ongoing inflation crisis. 

Let's check out some of the most common effects of inflation on your money and asset values: 

1. Real Estate
2. Bonds
3. Stocks
4. Commodities and Collectibles
5. Debt 

1. Real Estate

Higher inflation causes three key changes in the real estate market: 

1. Higher property prices: Higher inflation leads to higher prices for construction materials and labor costs, affecting the prices of new real estate properties. 
2. Higher interest rates: In a high inflationary environment, the Federal Reserve increases the interest rate on loans, resulting in higher interest payments on existing variable interest rate mortgages. It also drives up the cost of borrowing for new mortgages, deterring consumers from purchasing new properties.
3. Higher rental prices: As the cost of borrowing increases in a high inflationary period, consumers prefer renting over buying real estate properties. This creates a spike in demand for rental properties, which leads to an increase in rental prices.

2. Bonds

Higher inflation poses a threat to American consumers holding fixed-rate bonds as rising prices reduce the purchasing power of money. 

To counter rising inflation, investing in inflation indexed bonds such as the Treasury Inflation Protected Securities (TIPS) is a much safer option. 

3. Stocks

Higher inflation usually results in lower returns on your money, mainly due to the following two factors: 

1. Higher cost of borrowing: During high inflationary pressure, the central bank typically increases interest rates, resulting in a higher cost of borrowing for consumers. This leads to lower investment, holding back many firms' economic growth, thereby reducing the demand for their shares.
2. Uncertainty amongst investors: Inflation risk creates great uncertainty, resulting in many investors selling out their shares and investing their money in safer options. The outcome is lower profitability for firms, making their shares less appealing to investors. 

4. Commodities and Collectibles

Investors prefer to put their money into commodities for inflation protection because the value of this asset class remains stable or increases when the financial markets crash. These commodities include real assets like gold, oil, copper, and soybeans. The collectibles include rare wine, fine art, and the like. 

5. Debt

Depending on your debt type, inflation can cost you more or less:

1. Fixed-rate debt: If you have this loan type, you shouldn't be affected by high inflation, as the total amount of money you have to pay back in interest, is fixed (calculated before you take out the loan.)
2. Variable interest rate debt: A loan with a variable interest rate increases with a rising inflation rate. So, it's best to avoid taking this type of loan or even using your best credit cards during high inflation as the interest rates and overall borrowing costs tend to be higher. 

On the other hand, variable interest rate debt works in your favor during times of low inflation. 

How to Prepare for Inflation: 8 Expert Tips To Help You Save Money & Increase ROI

Here are eight essential tips to help you prepare for inflation: 

1. Consider Investing in Alternative Assets
2. Build A Diversified Investment Portfolio
3. Avoid Holding Excess Cash
4. Avoid Investing in Long-Term Fixed Income Securities
5. Switch Your Existing Debt To A Fixed Rate
6. Stock Up On Essential Non-Perishable Goods
7. Consider Inflation Proof Government Securities (TIPS)
8. Save More, Spend Less

1. Consider Investing in Alternative Assets

Alternatives, including commodities like gold, wine, and real estate, are dynamic assets, offering a stable return on investment and lower volatility than traditional assets. 

Since this asset class is not directly correlated to the Consumer Price Index, it offers great inflation protection and stable investment returns even amid rising inflation. 

For example, according to the Bureau Of Labor Statistics, between December 2020 to December 2021, inflation grew to over 7%. 

However, the fine wine asset class posted a gain of 19.10% during the same period, making it a popular choice among investors. That makes wine one of the most lucrative real assets in times of inflation.

Additionally, now investing in wine is easier than ever before. If you're looking to build a profitable wine investment portfolio, visit Vinovest. 

Vinovest helps you buy fine wine at the best possible prices and sell your bottles at the right time to the highest-paying buyer. You don't need to be a wine expert to kickstart your portfolio, as Vinovest assists you at every step of the way.

2. Build A Diversified Investment Portfolio

Building a diversified investment portfolio is one of the best wealth management strategies for protecting your money if the financial markets crash. 

Here are three important points to keep in mind when building an inflation proof investment portfolio: 

• Ensure you include a mix of growth stocks, bonds, real estate, mutual funds, commodities, and collectibles like wine in your portfolio.
• Choose investments with varying levels of risk and rates of return to help you cope with the rising inflation rate. 
• Evaluate your personal finance goals at least two times a year and make necessary changes to keep up with rising prices.

3. Avoid Holding Excess Cash

With the inflation rate rising, you’ll notice a price increase in consumer goods and services, resulting in diminished value of your money over time. So, holding cash during inflation is not advisable.

Instead, put all of your excess cash in investments such as real estate, growth stocks, and alternative assets that give you higher returns than the inflation rate.

4. Avoid Investing in Long-Term Fixed Income Securities

As long-term fixed-income securities offer a fixed interest rate until maturity, the purchasing power of the total interest earned diminishes with high inflation. 

For example, if you’ve invested in a bond at a fixed interest rate of 4% and inflation rises to 3%, the actual return on your investment is only 1%. 

5. Switch Your Existing Debt To A Fixed Rate

If you have an existing loan or mortgage with a variable interest rate, try switching it to a fixed rate. During rising inflation, the central bank raises interest rates. So, if you have a variable interest rate debt, your interest payments will increase. 

Additionally, in a high inflation environment, you should consider refinancing credit card debt with a lower fixed-rate loan to reduce the money you pay in total interest. 

6. Stock Up On Essential Non-Perishable Goods

High inflation and a rising Consumer Price Index diminish the purchasing power of your money with every passing day. Moreover, inflation results in a price increase for many commodities, especially food prices, so it's best to stock up on non-perishables.

Here, you should also consider products that will most likely be scarce in supply or will be sold at higher prices due to rising inflation.  

7. Consider Inflation Proof Government Securities (TIPS)

The Federal Reserve releases bonds such as the Treasury Inflation Protected Securities to protect your money against inflation.

These bonds are pegged to the Consumer Price Index, offering higher returns as inflation rises. However, TIPS are more expensive than conventional bonds and may lose value during low or moderate inflation.

8. Save More, Spend Less

Amid inflation fears, the Federal Reserve increases food prices and interest rates, so it’s best to review your personal finance goals and find ways to spend less and save more. You can try cutting back on unnecessary expenses such as eating out, streaming services, and long drives to cope with high inflation. 

Invest in Inflation Resistant Assets Like Fine Wine 

The best investment advice to beat inflation is to spread the risk across various holdings, especially alternative assets such as real estate, fine wine, and other collectibles.

Fine wine hasyielded steady returns with low market volatility amid high inflation, making it a great asset choice for many investors.  

So, sign up on the Vinovest website today to create an enviable wine investment portfolio with just a few clicks.