Yahoo Finance 5 Ways To Fight Inflation That Actually Work — And 5 That Don’t
If you’ve seen yourself paying a hefty bill at the grocery store or tried to fill your tank, only to get a fraction of what you once paid for, you’ve likely noticed that many of these costs have sky-rocketed.
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It’s easy to take a passive approach when facing rising inflation rates, but according to experts, there are certain do’s and don’ts when it comes to fighting it.
“It won’t work to hope for the best,” said Melanie Musson, finance expert with Clearsurance. “A plan is what you need. You have to make changes to keep up with reality. Whether you cut back or earn more, you need to take control of your finances to make them work with inflation. Hoping for the best won’t get you anywhere.”
Being proactive is your best bet when it comes to warding off the effects of inflation. Read below for more expert advice.
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Do: Invest In Inflation-Protected Securities
Justin Godur, finance advisor and founder of Capital Max, said one of the best ways to shield yourself from inflation is to invest in assets specifically designed to combat it.
“Treasury Inflation-Protected Securities (TIPS) are a prime example. These government bonds adjust their principal value with inflation, ensuring that your investment keeps pace with rising prices.”
“By holding TIPS, you’re not only preserving your purchasing power but also securing a relatively stable and safe investment.”
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Do: Diversify Your Income Streams
Another effective strategy is to diversify your income streams, Godur said.
“This can include side gigs, freelance work, or passive income sources such as rental properties or dividend-paying stocks.”
He explained that by diversifying, you reduce your dependency on a single income source that might not keep up with inflation.
“This approach not only mitigates risk but also increases your financial resilience against rising costs.”
Musson and other experts agreed: “You can fight inflation by picking up a seasonal or side job. The extra income can help you stay above water and save up for emergencies.”
“Diversification remains one of the most reliable strategies against inflation,” said Dennis Shirshikov, head of growth at GoSummer. “By spreading investments across various asset classes such as stocks, real estate, commodities, and international markets, you reduce the risk associated with inflation impacting a single sector.”
Do: Increase Your Earning Power
“Investing in skills and education can enhance your ability to earn more, thereby outpacing inflation,” Shirshikov said.
Whether it’s through advanced degrees, certifications or acquiring new skills relevant to your industry, he said increasing your earning potential can provide a significant buffer against rising costs.
Do: Cut Back on Discretionary Spending
“You can fight inflation by cutting back on discretionary spending,” Musson said. “It’s important to do things for yourself every month, but when you’re trying to survive rising costs before you have income that has kept up, you may need to look for lower-cost alternatives.”
For example, she explained that instead of a massage, you could spend an afternoon reading a book in the sunshine or instead of going to a concert, you could attend a farmer’s market.
Do: Optimize Your Budget
“Regularly reviewing and adjusting your budget can help you manage rising costs,” Shirshikov said. “Focus on reducing discretionary spending and increasing savings. Adopting a frugal lifestyle and cutting unnecessary expenses can significantly mitigate the impact of inflation.”
Don’t: Borrow Money
One way that won’t help you keep up with inflation is to borrow money, Musson advised.
“Borrowed money costs more than the purchase price because of the interest you’ll pay. The more you borrow, the further behind you will fall.”
Don’t: Hoard Cash
“Many people instinctively hold onto cash when inflation rises, believing it to be a safe haven,” Godur said. “However, this is counterproductive.
“Cash loses value over time when inflation increases, eroding your purchasing power. Instead of hoarding cash, consider investing in assets that have historically outpaced inflation, such as real estate or stock market index funds.”
Shirshikov agreed: “Keeping large amounts of cash during inflationary periods can erode your wealth.
“Inflation decreases the purchasing power of money over time, making cash holdings less valuable.”
Don’t: Cut Out Essential Expenses
Another common yet ineffective method, according to Godur, is drastically cutting essential expenses.
“While it might seem like a quick fix, it often leads to a lower quality of life and doesn’t address the root cause of financial strain.”
Instead of severe cutbacks, he suggested focusing on optimizing your spending and eliminating nonessential costs without compromising your standard of living.
“By implementing these well-researched strategies, you can effectively combat inflation and rising costs, ensuring a more secure financial future.”
Don’t: Invest In Long-Term Fixed-Rate Bonds
“Fixed-rate bonds can lose value during inflation because the fixed interest payments don’t keep up with rising prices,” Shirshikov said. “As inflation increases, the real return on these bonds decreases.”
Don’t: Ignore Your Debt
“Failing to manage debt effectively can be detrimental during inflation,” Shirshikov said. “Interest rates on variable-rate debts, such as credit cards or adjustable-rate mortgages, can increase, leading to higher payments.”
The Bottom Line
“Some things I advise against are risky investments, luxury purchases, and tapping home equity,” said Nischay Rawal, CPA and founder of NR Tax & Consulting. “Chasing higher returns often backfires, and discretionary spending power takes a hit during inflationary periods.
“Home equity should only be tapped for essential needs, not to fund excess consumption.
“The best defenses are cutting costs, paying off debt, and prudent financial planning. With discipline, businesses and consumers can overcome the challenges of rising prices.”
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This article originally appeared on GOBankingRates.com: 5 Ways To Fight Inflation That Actually Work — And 5 That Don’t
