Yahoo Finance 10 Ways To Protect Future Wealth as Cost of Living Goes Up
If inflation rates keep you up at night — don’t panic. Keeping a proactive mindset is essential for taking steps toward protecting your future wealth. According to experts, what’s important is that you take action today.
“Protecting future wealth is not just about preserving what you have but also about strategically growing your assets to outpace inflation,” said Chris Yang, personal finance consultant and co-founder of Coins-Value.
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By implementing these strategies, individuals can build a robust financial foundation capable of withstanding economic pressures and securing long-term prosperity.
Below are some ways you can protect yourself as the cost of living goes up:
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Diversify Investments Across Asset Classes
One of the most effective strategies to protect future wealth is diversifying investments across different asset classes.
“By spreading investments across stocks, bonds, real estate, and commodities, individuals can mitigate risks associated with any single market downturn,” said Dennis Shirshikov, head of growth at GoSummer and finance professor at the City University of New York.
For example, during periods of high inflation, real estate and commodities like gold tend to perform well, offsetting losses in other areas.
Yang agreed. “Diversification is the cornerstone of wealth protection in the face of rising living costs.”
He added that a well-balanced portfolio that includes a mix of stocks, bonds, real estate, and alternative investments can help mitigate risks and preserve wealth over the long term.
“For instance, one of my clients, a 45-year-old professional, maintained a 7% annual return on their investments despite a 4% inflation rate by strategically allocating 40% to inflation-protected securities, 30% to value stocks, 20% to real estate investment trusts (REITs), and 10% to precious metals,” Yang said.
He noted that this diversified approach preserved their wealth and provided a 3% real return after accounting for inflation.
Increase Your Earning Potential
Another crucial strategy is to focus on increasing your earning potential. Upskilling or reskilling can lead to significant income growth, outpacing inflation.
“I’ve witnessed clients who invested in their education see an average salary increase of 15-20% within two years, effectively countering the impact of rising living costs,” said Yang.
Shirshikov equally agreed that investing in skills and education is key.
“One less conventional yet highly effective way to protect future wealth is investing in personal skills and education,” Shirshikov said.
Enhancing your skill set can lead to higher earning potential and better job security, which is crucial in an economy where the cost of living is continually rising.
“For instance, gaining expertise in high-demand fields like technology, healthcare, or finance can open doors to lucrative career opportunities,” Shirshikov said.
Decrease Spending
According to Melanie Musson, finance expert with Clearsurance, if you’re still facing increased prices despite your efforts to keep your spending consistent, you may need to cut back on your spending so you don’t run out of money.
“Start by making small changes that allow you to do what you’re used to but at a savings. For example, shop for grocery sales and meal plans to save money on groceries.” Musson said.
She also recommended traveling to less expensive vacation destinations and opting for early bird restaurant specials rather than the full-priced menu.
“If these small changes aren’t enough, you’ll need to make bigger changes, like working a part-time job or switching to one car instead of two,” Musson said.
Be Consistent With Long-Term Investing
Additionally, embracing the power of compound interest through consistent, long-term investing is vital.
“By starting early and reinvesting dividends, one can harness the full potential of compound growth,” Yang noted. “For example, a 25-year-old investing $500 monthly with an average annual return of 8% could accumulate over $1.5 million by age 65, even if inflation averages 3% annually.”
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Consider the Importance of Reducing High-Interest Debt
“Every dollar saved on interest payments is a dollar that can be invested in the future,” Yang said. “I’ve seen clients reduce their debt-to-income ratio by 30% in 18 months by implementing aggressive debt repayment strategies, freeing up substantial funds for wealth-building activities.”
Invest in Inflation-Protected Securities
According to Shirshikov, inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS) in the U.S., are designed to protect against inflation.
“The principal value of TIPS increases with inflation, as measured by the Consumer Price Index (CPI), and decreases with deflation. This ensures that your investment keeps pace with rising prices.” Shirshikov said.
Leverage Tax-Advantaged Accounts
Tax-advantaged accounts like Roth IRAs, 401(k)s and Health Savings Accounts (HSAs) can significantly enhance wealth preservation.
“These accounts offer tax benefits that can help offset the impact of inflation,” Shirshikov said.
Contributions to these accounts grow tax-free or tax-deferred, which can lead to substantial long-term savings.
“For example, the compounding growth in a Roth IRA, where withdrawals are tax-free, can be particularly advantageous during retirement when the cost of living is higher,” Shirshikov said.
By maximizing contributions to these accounts, individuals can create a robust financial cushion that grows more efficiently over time.
John Crist, founder of Prestizia Insurance, also recommended maximizing tax-advantaged accounts like 401(k)s, IRAs and HSAs, which allow money to compound largely tax-free.
“For a business owner client, maximizing these accounts added over $50,000 to savings in one year.”
Consider an Irrevocable Trust for Larger Portfolios
Trusts can provide asset protection, minimize estate taxes and distribute wealth efficiently to beneficiaries.
“I helped one family establish a $3 million trust, saving $500,000 in potential estate taxes while still allowing access to income,” Crist said.
Diversify Globally
Investing in global stocks and real estate provides more opportunities for strong returns and inflation protection.
“One tech executive client had most investments in U.S. tech stocks. I advised diversifying globally, and his global holdings have significantly outperformed his tech stocks.” Crist said.
Seek Advice from Experienced Professionals
“We stay up-to-date with the latest legal, tax and financial strategies to help clients protect their wealth,” Crist noted.
For the best advice, he said to look for specialists in areas like tax, trust and estate law, financial planning, and investment management.
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This article originally appeared on GOBankingRates.com: 10 Ways To Protect Future Wealth as Cost of Living Goes Up
