How Does Inflation Affect Your Net Worth? 5 Ways to Beat Inflation
Inflation is dreaded by economists, central banks, and pretty much everyone else. It can be referred to as the percentage rise in most goods and services such as food, clothing, housing, etc. Although an average inflation rate is a sign of a healthy economy, rates that are too low or too high indicate a decrease in the purchasing power of a unit of a country’s currency. Especially in developing nations like India, we have seen dynamic inflation rates ranging from as high as 13.48% in 1992 to as low as 3.6% in 2017.
When you tend to analyse your net worth, inflation stands as a key factor. So, let’s take a deeper look into how inflation affects your net worth and ways to beat it.
How does inflation affect your savings?
As prices typically go up in the future, it reduces the value of your savings. For instance, if you save ₹10,000 to buy essential commodities, that money may not be able to buy as much ten years into the future as it can today. While you haven't actually lost money, you end up with a smaller net worth because inflation eats into your purchasing power.
How does inflation affect your investments?
The impact of inflation depends on the investment type. For example, traditional bonds usually have set annual returns where inflation can hurt performance. If you receive a payment of ₹5000 per year, that payment would be worth less each year given the inflation rate.
5 ways to beat inflation
Real estate can easily be a potential earning opportunity when consumer index prices rise. Here are two ways to achieve it:
- Direct ownership: In this, you own property and earn rent from it. As property prices rise, the landlord can charge higher rent.
- Indirect ownership: Here, you invest in real estate through a real estate investment trust (REIT). REITs are entities that own and operate income-producing real estate, consisting of a real estate pool that pays out dividends to its investors.
2. Invest in precious metals
Historically, precious metals like gold, silver, etc., perform well even in high inflation as they tend to retain their value even if the currency weakens. For example, gold and silver in India hold cultural and industrial value, making India one of the largest gold markets. During times of inflation, investors often flock to stable, solid investments like physical gold and silver as a way to store their wealth.
3. Look for companies that can raise prices during high inflation.
Essential commodities like tradable raw materials, agricultural products, oil, grains, spices, and natural gas tend to be one of the asset classes most positively correlated with inflation. Commodities also tend to be uncorrelated with the stock market that can add a diversification benefit to an investor’s portfolio. However, Investors should be aware that commodities are highly volatile.
4. Steer clear off bonds and fixed annuities
When the consumer index price goes high, a bond’s fixed income becomes less attractive because that income buys fewer goods and services. With interest rates still hovering near record lows, bond investors often get hurt significantly in an inflationary environment.
5. Limit your wants
One of the best defences to the ill effects and being worried about inflation is limiting a lot of silly needs in your life. In other words, you don’t have to drown yourself in demand for unnecessary consumer goods.
Inflation can hurt your net worth in several ways if you aren’t prepared. The best way to curb the negative effects of inflation is through smart investments. Thankfully, you can achieve your dream inflation-proof portfolio with the proper knowledge and guidance by taking a wealth management course in India by OAWA. Learn to manage your finances wisely today!