Tips to Safeguard Your Money Against Inflation

You’ve probably heard that the value of money isn’t always static. It changes, and one of the most significant drivers of this change is inflation.

Inflation is a persistent economic problem that has plagued many countries around the world for decades. Inflation occurs when the general price level of goods and services increases over time, resulting in a decrease in the purchasing power of money.

According to recent research by Statista, the global inflation rate has been on an upward trend and reached 8.71% in 2022, compared to 4.71% in 2021. This represents a significant increase of 4% in the global inflation rate, which is higher than the previous year.

However, the inflation rate varies from country to country, and some nations are experiencing higher inflation rates than others. For instance, Nigeria’s current inflation rate is at a staggering 27.33% as of Sepetember 2023, while Kenya’s stands at 6.8%. This disparity highlights the severity of the problem and how it affects different countries.

The effects of inflation are far-reaching, and they can have a direct impact on individuals, households, and businesses. The constant rise in the cost of goods and services can significantly affect one’s ability to provide for themselves and their loved ones, save for the future, and invest in profitable ventures. It is, therefore, essential to develop effective strategies to combat inflation and safeguard one’s financial future.

In this article, we will explore five proven tips to safeguard your money against inflation and protect your finances. But first, it is crucial to understand the basics of inflation, its causes, and how it affects the lifestyle and cash flows of individuals and businesses. 

Understand the Impact of Inflation 

Inflation is a phenomenon that affects the value of money over time. It refers to the general increase in the prices of goods and services and the subsequent decrease in the purchasing power of money. Essentially, it means that the same amount of money will not be able to buy the same goods or services as before due to the rise in prices.

For instance, in Nigeria, the exchange rate of the Naira to the US dollar has increased drastically in recent times, with the black market rate currently at #1135 for 1 dollar against the official rate of #450 in January. This has led to a hike in the prices of goods and services, making it difficult for the average Nigerian to afford basic necessities.

Inflation affects the economy in several ways, including the daily livelihood of individuals in the country. The cost of living, the price of food, and other necessities are all impacted by inflation. High inflation rates can increase a nation’s poverty rate and make daily living more challenging, especially for low-income earners. It can also lead to a nation going into bad debt and the poor becoming even poorer.

Inflation can be challenging to understand and guard against, particularly if one is unaware of its causes.

Two Major Causes of Inflation

• Demand-pull
• Cost-push.

Demand-pull inflation: occurs when there is a sharp increase in demand for goods and services while the supply remains the same or decreases in an economy. When the demand for goods and services surpasses the supply available, the prices of these goods and services increase, leading to inflation. This is commonly described as “too much money chasing too few goods.”

Cost-push inflation: results from an increase in the production costs of goods and services. This increase tends to raise consumer prices, regardless of the level of demand in an economy. Factors that can contribute to cost-push inflation include natural disasters, wage increases, and taxes. When the cost of production goes up, producers are left with no choice but to increase the prices of goods and services, leading to inflation.

6 Tips to Safeguard Your Money Against Inflation

Ready to combat inflation and protect your finances from losing more value? The following tips will help

1. Invest in Inflation-Protected Securities 

An inflation-protected security (IPS) is a type of investment designed to help investors guard their money against the eroding effects of inflation. This is an excellent strategy for business owners and financially savvy individuals who are looking to maintain their purchasing power, even in fluctuating economic conditions. 

 In the U.S., for instance, one of the most popular types of inflation-protected securities are Treasury Inflation Protected Securities (TIPS). TIPS are government-backed bonds that automatically adjust with inflation as measured by the Consumer Price Index (CPI). This means the value of your investment increases with inflation, ensuring your wealth isn’t depleted over time. 

However, like any investment, it’s crucial you do your due diligence before venturing into inflation-protected securities. Understand the risks, such as liquidity risk and the potential for deflation, and make sure they align with your financial goals and risk tolerance. 

• TIPS: As mentioned, these are U.S. Treasury bonds that are indexed to inflation. The principal value of TIPS increases with inflation, as measured by the CPI, and so does the interest you receive.
• Inflation-Protected Bond Funds: These are mutual funds that invest in inflation-protected bonds issued by various governments worldwide. They offer diversification as they contain bonds from many different issuers.
• Real Return Bonds (RRBs): These are Canadian government bonds that are indexed to the Canadian inflation rate. The principal and the interest payments of RRBs increase with inflation.

The primary benefit of investing in inflation-protected securities is that they provide a reliable hedge against inflation, which is particularly useful in volatile economies. Nonetheless, remember that while these tools can help protect against inflation, they themselves are not immune to market risk. Therefore, it’s essential to incorporate them into a diversified investment strategy for best results. 

2. Improve Your Financial Literacy 

Understanding how money works, along with inflation’s role in our economy, is key to not only protecting but also growing your wealth. As they say, knowledge is power, and in this context, financial literacy is potentially profitable.

See, when it comes to inflation, it’s not just about counting pennies – it’s more about strategic financial management. So, how can improving your financial literacy shield your money against inflation? 

By understanding what causes inflation (like surge in demand, increase in production costs, etc.), and how it affects the economy (your purchasing power, interest rates, etc.), you’re in a better position to sketch out your financial strategies like investments and savings. 

Also, keeping tabs on the inflation rate is important, but it doesn’t tell you the whole story. You need to dig a little deeper and understand how different sectors and markets are being affected.

For instance, if healthcare costs are rising faster than the inflation rate, it may influence decisions about health insurance. Hence, the more you understand the dynamics of the financial world, the smarter decisions you can make to take advantage of inflation, rather than fall victim to it. 

3. Invest In Yourself

Investing in yourself is perhaps the most crucial piece of advice to withstand the effects of inflation and maintain the value of your money.

“But how does investing in myself exactly help fight inflation?”, you may ask. 

Investing in yourself primarily involves enhancing your skill set, acquiring up-to-date knowledge, and maintaining good health. These inputs go a long way in increasing your earning capability, which can serve as a potent defense against inflation. 

Here’s why investing in yourself is a surefire way to safeguard your money from inflation: 

• Building and Upgrading Your Skills: By constantly learning and upgrading your skills, you’re arming yourself with the tools to earn more money. Got a business? Awesome. A newfound skill can open up alternative revenue streams or make your business operations more efficient, ultimately boosting your profits. 
• Maintain Good Health: With everyone juggling multiple jobs/hustles these days, it’s easy to sideline your health. But here’s the thing – staying healthy is an excellent investment. Staying fit and healthy reduces medical expenses and ensures you’re always at your best to manage your business or job efficiently. I bet you don’t want inflation eating up your hard-earned money while you’re battling high medical bills.
• Build an Impressive Network: A strong network can do wonders for your income potential. It can bring new business opportunities, widen your client base, and provide you with valuable advice to increase your earnings.

However, I’m not saying that investing in yourself will immediately result in increased income. It’s a process, sometimes a long one, but absolutely worth the investment. It often pays off by putting you in a better position to handle your finances and stay afloat even when inflation rises.

4. Setup an Emergency Fund 

An emergency fund is there to safeguard your financial health when life throws you curveballs. Let me give you some scenarios. What if your business hits a dry season? Or you have unexpected medical expenses? Or any other sudden, unforeseen financial hiccup? 

Most financial experts would advise having three to six months’ worth of living expenses in your emergency fund. Sounds daunting? Don’t worry – you don’t have to get there overnight.

Start small and keep adding to it gradually, but consistently. Before you know it, you’ll have peace of mind that money can buy! 

Bottom line? An emergency fund might not make you rich, but it can prevent you from becoming financially devastated. That, at the end of the day, is an invaluable shield against inflation and financial uncertainty. 

5. Cut Down Unnecessary Expenses

You know that old saying, “A penny saved is a penny earned”? Never has it been more true than during times of inflation. Reducing unnecessary expenses is an effective safeguard against inflation that’s totally within your control. Let’s dive in! 

Firstly, it’s crucial to differentiate between ‘needs’ and ‘wants’. Necessities are the basic things you can’t live without – food, shelter, healthcare – while the ‘wants’ encompass the more indulgent expenditures that, in reality, may not be necessary.

You know, the fancy coffees, the designer clothes, the new tech gadget that’s just begging to be purchased. So long as you can survive without them, you might want to cut them off and create a realistic budget for managing your finances.  

To get the most out of your budget, follow these steps: 

• Analyze Your Expenses: Scrutinize bank statements, receipts, and credit card bills. Identify and list out all the ‘wants’ sneaking into your monthly budget. sort them according to their importance. Ranking them will help you understand where your money is flowing unnecessarily. Sometimes, what we think is a minor expense, turns out to be a significant cash drainer. 
• Eliminate or Reduce Expenditures: Once you’ve nailed down these areas of excess, start cutting. You’ll be amazed at how much money you can save from simple changes like cooking your meals instead of dining out, or canceling unused memberships, etc.
• Continue Re-evaluating: Your financial situation can’t be put on autopilot. Regularly review and re-adjust your spending habits to remain inflation-proof.

Finally, find a balance that works for you and enables you to have a secure financial future without compromising entirely on the present. 

6. Diversify Your Investment Portfolio 

A diversified investment portfolio gives you a unique blend of different investment types – it’s like having a buffet, but in the financial world. You could have equities, bonds, properties, cash, and even gold or other precious metals in your portfolio. 

When inflation surges, the value of money drops and certain investments may experience a loss in value. However, not all investments respond the same way to inflation. By diversifying, you can reduce the risk associated with the impact of inflation on any single investment. So, it’s like putting your eggs in different baskets instead of just one. 

For starters, you can check out the following:

• Invest in Real Estate: During inflationary periods, property values and rents often increase. As such, investing in real estate could be a hedge against inflation.
• Bonds and Stocks: These might swing wild during inflation and could give you a higher return on your investments.
• Gold and Other Precious Metals: Historically, gold has performed well during inflation. It could be a safe haven for your money when the cost of living is on the rise.
• Cash and Cash Equivalents: It’s always a good idea to have some liquid assets in your portfolio. You may need them for unforeseen needs.

Don’t forget that diversification is a continuous process. Regular portfolio reviews will help you stay in line with your goals and risk tolerance. Balancing your investments helps in safeguarding your money against inflation, while potentially achieving your financial goals. 

Conclusion

It’s not enough to just be aware of inflation; you need to actively safeguard your money against it. With the right strategies and financial discipline, you can protect your investments, maintain your purchasing power, and thrive even in inflationary times.