Eight Ways How Inflation Threatens Your Income, and 13 Ways to Fight It

Money with shrinking value

Summary

  • Inflation is almost always bad for you.
  • The danger is huge. Worldwide, important central banks are trying to inflate the money.
  • Inflation threatens your income, wealth, savings. Increases debt burdens. Get ready to fight it.
  • There are at least 13 ways to defend yourself. Read the list.

How Bad Is Inflation for Your Income, Savings, and Debt?

Inflation is when prices surge in general, on average. With the same amount of money, you can buy fewer products and services in the future than before. Or, to pay the same products or services, you need more money than earlier. Economists say a few percents of inflation is needed for healthy growth and to maintain jobs. But for individuals, like you and me, inflation is almost always bad.

Inflation Threatens Your Income At Least If:

  1. You have cash in your pocket (we all have). It loses its value slowly. Like by some sort of invisible tax.
  2. You have money in any bank account or any other investment which has a lower return than the inflation.
  3. Your wage or other incomes aren’t following the inflation, aren’t surging at the same pace.
  4. You are in debt. Higher inflation can result in higher interests, which is a disadvantage for you. Monthly loan payments soar.
  5. Inflation can cause the devaluation of the national currency. That can be an extra burden for you if you want to travel abroad, buy a bigger imported product (like a car). Or, if you have debt in a foreign currency.
  6. The state is cheating, manipulating the value of inflation. (Happens in dictatorships or extremist-ruled states in the first place.)
  7. The return of your investments reaches inflation. But your consumption is different than the consumption of the average people. Your expenses increase more than official inflation.
  8. Finances become chaotic. Especially with a higher, two– or more digits inflation, it gets hard to do any financial planning. Not only for you as an individual, but also for vendors, entrepreneurs, companies.

Inflation is, by the definition of Investopedia:

…measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. (…) indicates a decrease in the purchasing power of a nation’s currency.

Why Is Inflation a Huge Threat for Our Income?

See, inflation is almost always bad for the average person. For our incomes, savings, debts, plans, all the future. Inflation is mostly in the interest of governments or central banks. It is more or less happening according to their intent, plans. Some of them recognize it, some not, it isn’t a conspiracy theory. With too much public debt, they can do three things:

  1. The difficult way is to repay it completely. That happens often cutting expenses and increasing revenues through stronger taxation (austerity).
  2. Refuse to repay it and report bankruptcy.
  3. Depreciate it slowly by inflation, negative real interest rates.

The world has accumulated huge mountains of debt, so the risk of more inflation is serious. The third version mentioned is common, has been used in recent years. For example, in the European Union. There are many government bonds and bank savings rates with yields around zero, or even negative – by 1-2 percent yearly inflation.

Inflated Yugoslav Dinar, 1993
Unwanted billionaires. Inflated Yugoslav Dinar, 1993
(Source: Wikimedia Commons) 

In the US, inflation is around two percent. While the one-year government bond yield is 1.5 percent (in early 2020). The average savings account rate in the USA was only 0.64 percent. The mortgage credit rates were three percentage points higher, by 3.65 on average in the US, in the week ending 16th January. Savings are decreasing in value in most parts of the Earth. That’s why inflation is often called a hidden tax. (Remember: inflation is an indicator of the past, and interest will be paid in the future. So this data are more an estimate, an example.)

Inflation Wars

I still remember what my grandmother told me about the end of World War II. in Europe. The local paper money made no sense anymore. People were paying each other with US dollars, Swiss francs, cigarettes, gold, silver, canned food, or eggs. Fortunately, we aren’t in a war, but this is an instructive example. Physical or tangible assets can be a good way to fight inflation. Let’s see the methods to defend the value of our income, savings, wealth.

1. Re-negotiate Your Payment

Employers rarely raise wages voluntarily. We often have to put pressure on them. It is easier if we know that wages are rising throughout the whole national economy. Furthermore, if all colleagues are cooperating, negotiating together. (Like a labor union.) Better if we have performed well in our job and are improving in our profession.

2. Get Rid of Your Debt

Even if the interest rate on deposits is below inflation, the interest rates you pay on loans will be above that. One of the best investments is: not to pay others too much. Repay your credit, return your credit card. Better never spend more than your incomes. It has no sense to receive two percent interest and pay four percent at the same time. However, in some cases, inflation can be superior to your mortgage credit interests. Possibly there is no need to prepay low-interest loans. It depends also if you have saved money and how you can invest it.

3. Inflation-Linked or Special Bonds?

Take a look around the savings, investment market. In some countries, inflation-linked or special retail government bonds exist. Elsewhere, banks may offer more – but look at the guarantees they offer. (Such as national deposit insurance.) But remember the risks. Small investors should prefer more risk-free solutions. If there is no safe solution in your country, better move on, continue reading this list.

4. Invest in Yourself

Apply for any training, course, evening school, which will help you earn more later. We must educate ourselves regularly, even if it is difficult to work and study at the same time. Let’s invest in ourselves! Or, in the education of our children! (Read also our previous article:  Which Is Your Best Source of Money? Investing, Saving or Earning?)

5. Smart Home Buying

Is it time to buy your first home? Or exchange your home for a bigger one? Inflation often raises property prices – though, not always. And later on, we will be able to buy the same only at higher prices. If your savings are losing their value anyway, it can be better to spend them. In the first line, if you save on rent, or on travel time to your workplace, family members.

Home Buying
Home Buying

But make a multi-year financial plan of the expected expenses, revenues, and savings. Don’t overdo it or buy a property that you do not need. Avoid too high levels of debt. Evade overpriced, upscale, fashionable, already very expensive properties and neighborhoods. Real estate prices can also plunge.

6. Let’s Save Some Energy

Insulating an existing property and modernizing your heating system can provide much higher returns than low-interest rates. Replacing your car with a new one that consumes less and has to be repaired less often can also pay off in most cases. If you have a business, you can modernize your machinery.

7. No Coffin, More Pensions

Coffins and the funerals are expensive. Don’t give away your pension either… Another way of investing in ourselves is to take care of our health. We can continue working and earning – or, enjoying life – until a higher age. Whoever pays our pension (retirement), will have to pay it for decades. Swimming pool pass, gym entry, indoor spin bike, relaxing holiday, healthier meals, thorough medical examination, smoking cessation treatment. There are no better investments in the world like these.

8. May You Touch Equities?

Equities, like real estate, may rise in price due to inflation. Many of the richest people in the world made his fortune through equity investments. Now, in early 2020, however, many experts fear that stock markets are showing signs of a bubble. The “bull market”, the climbing prices may last even for years. But also a bigger downturn can start every time, tomorrow. The younger you are, and the higher your risk tolerance level, the more shares you can buy. This is the recommendation of investment advisors. In our opinion, most people should invest only a smaller amount of their money in such risky assets. Especially by these historical stock market index levels.

9. The Classic Precious Metals

Gold, silver and platinum have been well-known tools for protecting against inflation for centuries. However, in the short to medium term, which may mean many years, their prices show great volatility. (Almost like equities.) The prices of other commodity products behave similarly. It is advisable to invest only with a small part of your funds in metals. The problem with physical precious metal objects, like coins or bars (bullion) is that their safe storage and transportation are expensive. In general, there is at least a 5-10 percent margin between retail buying and selling prices. You lose some percent at buying, another percent at selling. “Paper gold” – exchange-traded gold funds (ETFs), certificates – can be better or worse, depending on the issuer’s risk level.

10. Gold or Silver Mines

A possible alternative to metals is to buy mining shares that can move on a different path than the mainstream stock market. (Unfortunately, this way can lead also steeply down, as shown by the gold mine stocks from 2011 to the end of 2015.)

11. Real Estate Investments

You can buy real estate (house, apartment for rent, farmland, etc.) as an investment. But these investments also fluctuate in price, like stocks or commodities, and may fall strong in value. (Remember the housing crisis of 2007-2009 in many countries.) The selection of real estate investment targets requires great expertise, as well as their monetization and operation. It can be better for the average person to buy real estate through investment funds or real estate investment companies (REITs). This is where professionals, asset managers do all special work, but they are usually quite expensive.

12. Artifacts and Gems

Gems, artifacts, furniture, oldtimer cars, and other antiques can, in theory, also be good protection against inflation. Their main problem is that each piece is unique. Their prices can be extremely volatile and require considerable expertise and routine to estimate their value. The vast majority of people do not have such expertise and are therefore highly exposed to mistakes and frauds. But if you have some valuable antique at home, take care of it. One day you can still sell it at a good price.

13. Start Your Business

If you have plans on how to start your own business that requires investment, then it’s time to get started. Every dollar invested may be multiplied in the future if your business is successful.

More Important Readings About Your Money

References:

Remark

There is a lot of controversy about the proper way to calculate inflation, the shortcomings of the current methods. More and more people call official inflation numbers wrong. In this article, however, we have assumed that most inflation figures give a roughly realistic picture of the depreciation of the value of money.

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research, or consult your advisors before making any investment or financial or legal decisions.

(Photos if not indicated otherwise: Pixabay.com)

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