How to Protect Your Savings from an Inflation Risk

Investments, Savings
By hiveup,

 

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Inflation is that economic term that you’ve probably heard every second person use since time. At the macro level, it has the power to cause an economic crash or boom. And at the micro level, it has the power to make you, the consumer, rich or poor.

So, what is inflation? Technically, inflation is the percentage change in the Consumer Price Index on a year-on year basis. But in simpler terms, it occurs when there’s an imbalance between demand and supply of money. Because of this imbalance, each unit of currency then starts to buy fewer goods and services. And that’s when you start to suffer.

Suppose, you’ve saved up SGD100 in a savings account that accrues an interest of 5%. At the end of the year, you have SGD105. Now, if inflation in your resident country has remained stable for the past year or has increased by a margin that keeps the overall rate below 5%, then your purchasing power or your ability to buy goods and services increases. But, if the inflation rate following the past year has risen to above 5%, then your purchasing power decreases. Thereby, compelling you to purchase fewer goods and services. The risk that comes with this rise in the inflation rate is called an Inflation Risk. Then the next question is whether there’s been a rise in the local inflation rate.

According to the Monetary Authority of Singapore, for 2017, core inflation is expected to average at around 1–2%, as against 0.9% in 2016. In lieu of such an increase, it is necessary that you prepare a safety net from market fluctuations. There are several ways through which you can ensure that your assets maintain purchasing power.

Here are a couple of tips for you:

  • Invest in fewer Long-term Bonds and More Long-term Stocks

Against common belief, bonds aren’t all that safe when compared to stocks. The problem lies in the fixed interest rate that accompanies the purchase of a Long-Term Bond. Suppose, back in the day, you purchased a Long-Term Bond at 5% but the current rate of inflation is at a staggering 10%. Although you’re still earning income from those bonds, it doesn’t have as much or any such value as it did when you initially purchased that bond.

Instead, try investing in stocks of commodity companies or healthcare names with the strongest profit margins in the market. But make sure that you’re investing with the objective of NOT selling out too soon.

  • Invest in Assets that Increase your Cash flows

Owning assets whose prices fluctuate with inflation can serve as a safety net from erratic market fluctuations. Investing in property is one such example of asset ownership. This is because property prices adjust according to the market. However, it is important that such investment is done with a long-term agenda.

(Pro-tip: In case you’re taking a loan against your property, take a mortgage instead of a fixed rate loan. This is because mortgages allow you to pay off a little bit of the principal over an extended period. But fixed rate long-term loans compel you to pay off your debt with cheaper currency.)

  • Invest in Independent Commodities

Independent commodities basically include all those commodities in the market that move independently of currencies. These normally include gold, silver, timber, or other such natural commodities. One way to invest in such commodities is by investing in farm land. The advantage of such an investment is that if people need such commodities they would be willing to pay for it in any currency. In this way, you always have purchasing power, in one currency or another.

  • Invest in Yourself

Investing in yourself is the one foolproof way of protecting your savings from inflation because it doesn’t require you to depend on anyone but yourself. Invest in educating yourself in contemporary fields that have future potential. By doing this, you can develop a versatile set of skills that shall ensure your employment in the face of a recession or an inflation.

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