5 Effective Ways To Protect Yourself from Rising Inflation

by Scott Bradley · 29 comments

dollar squeezedIt is no mystery to anyone that the US government has pumped trillions of dollars into the economy, all while holding interest rates at record lows over the past two years. Anyone with a basic concept of supply and demand, with all of these dollars in our economic system, will fear that rising inflation is becoming more and more imminent as each day passes.

Even though our government is doing everything they can to get our economy back on its feet, we as financially educated individuals must find ways to protect ourselves against the possibility that we may be facing future periods of serious inflation…and even worse…hyper-inflation.

Below are some key ways and investing strategies you can implement into your financial plans and portfolios to make sure you don’t fall victim to a diminished purchasing power.

Follow at least one of these investing strategies, and you will counterbalance the effect of inflation. Follow two, and you will thrive when inflation starts to rise. Follow three, well, use your imagination!

1) Buy Physical Gold and Silver

gold bars
By investing your dollars into physical assets such as gold or silver, you fully protect yourself as inflation increases or decreases. As the value of the dollar goes down, the price of these precious metals tend to increase in value.

Additionally, a metal like silver differs with gold because it is in limited supply, and is used by big companies around the world. Where gold is hoarded, silver is still used and will only increase in value as the silver supply continues to decrease over time. Having a mix of both of these precious metals on hand is a great way to protect yourself from rising inflation. Just be sure that you have the metals on hand and purchase them from a certified dealer so you won’t be scammed.

2) Invest In Other Currency

eurotic
If the American currency decreases in value, other currencies will increase in value (at least relatively). Last time I checked, the Euro is 1.5 times the value of the dollar, but don’t quote me on it. Be sure that you know what you are doing if you choose to invest in other currencies as this can be extremely risky if you are clueless as to how this works.

If you play the market right though, you will still end up on top by diversifying your currency holdings in your portfolio of investments. Again, be sure that you have physical currency on hand, as purchasing “derivatives” of paper currency in the market can be manipulated and leave you with more risk than if you physically held it.

3) Invest in Positive Cashflow Producing Real Estate

real estate
When investing your money into real estate outside of your personal residence, be sure that the properties you invest in will turn a positive cash flow on a monthly basis. If you don’t know what that means, be sure that the income from the renter’s monthly rent covers all of the expenses of maintaining the property. Also, budget to have some left over for yourself as this becomes passive income.

The beauty of owning cash flow producing real estate is that not only do you make money on a monthly basis, you are also exposed to the possibility of asset appreciation. Additionally, you get to create phantom income as you write off on the depreciation of the structure of the property over time. Whatever you do, do not invest in something that will turn a negative cash flow from day one…this property will eat you alive…even if it increases in value. Before you decide to invest in a piece of property, I would highly suggest that you get professional advice from your advisers and mentors.

4) Start a Business

start a businessBy starting a business, you also begin to build an asset that increases or decreases in value as inflation rises or falls. The inflation rate doesn’t directly impact the value of your business, but it certainly affects what you can charge for your goods and services that you provide to the market.

By managing your business cash flow each month, you can cushion the effect of inflation and also leverage the extra cash flow to invest in real estate and physical precious metals. On the other hand, working at a job gives you very little, if any, control over the income you make.

Even if you just start a side business, get something going!

5) Find The Highest Interest Bearing Saving’s and Checking Accounts

high interest savings
No matter what, we all will need to have some cash on hand at all times even if inflation gets really bad. To put you in the best position possible, be sure to keep your money in the highest paying savings/checking accounts (here’s a list of the best Online Savings Accounts) or in treasury inflation-protection securities (TIPS).

As inflation rises, your money will be safer in these vehicles compared to those that don’t accumulate interest, or more speculative investments. Having cash on hand is important no matter what the inflation rate is. Just be sure that you are being paid the highest interest rate possible no matter where you keep your money.

These are the best tips I can give you to help you weather any “inflation storm” that we our bound to experience. If you have any other suggestions for readers please feel free to share them in the comments!

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{ 29 comments… read them below or add one }

Owen December 2, 2009 at 7:16 am

Gold can fluctuate in value quite wildly. It’s at an historical high value of $1200 an ounce now, I just wish I’d invested in it when it was less than $300 an ounce.

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MoneyNing December 2, 2009 at 12:44 pm

I believe gold has become a short term play, because it’s not a consumable commodity and when demand slows because speculative needs are exhausted, the prices will fall back down.

As a long term investment, look elsewhere. As a short term play, know the risks.

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Daniel December 2, 2009 at 1:08 pm

I agree, 20smoney actually posted a great article detailing why people SHOULD look into gold. But I saw this post about why in the long term, gold isn’t a good investment. It was written awhile ago, but definitely still applies.

http://www.fool.com/investing/mutual-funds/2007/09/28/gold-vs-the-sp-500.aspx

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marci December 2, 2009 at 7:53 am

Pay off your house and become debt-free…. you won’t have to be earning inflated rate money to pay off debts with.

If you own your house, then no matter what the rents rise to, you won’t have to worry about paying them.

The less money you HAVE to generate each month, the better off you will be.

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MoneyNing December 2, 2009 at 12:50 pm

It also depends on where you live. Be wary of property taxes, mello roos taxes, maintenance and everything else that you need to upkeep your home.

You can be in trouble even if you pay off your house. A good example is Grey Gardens, which is a fascinating documentary.

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al goar July 17, 2012 at 3:46 pm

For starters, having fixed rate debt when there is inflation is a good thing not bad. The asset you own will inflate but the dent will not. Why do you think that Ben Bernanke wishes he had some form of inflationary risks. The Japanese sure wish they did. As for the starting a business this is a two edged sword. It has to be one where the demand is stable. Owning a Hermes franchise is never going to work when this happens. We require food, shelter and sex. Make sure you are selling one of these.

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Sam December 2, 2009 at 11:28 am

I love TIPS, since it’s so easy to buy with ETFs now. I highly recommend it if you are looking for a straight play on rising inflation, as everything else is not as pure.

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Tesla December 2, 2009 at 12:18 pm

Good basic knowledge on real estate investing. Too few people have respect for cash flow in the real estate business, and they either get lucky by market appreciation or they lose their shirt.

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Frugal Francis December 2, 2009 at 1:19 pm

Great Article David.

Does anyone have any good beginner resources on cash flow positive real estate investing?

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MoneyNing December 2, 2009 at 5:40 pm

I actually like REITs myself. It’s easy, and the returns are just as good. Being a landlord is work, and it’s hardly worth it (for me anyway) because the time I need to spend maintaining everything can be spent on other money generating activities.

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John DeFlumeri Jr December 2, 2009 at 2:25 pm

Starting a low-overhead business I like the idea.

John DeFlumeri Jr

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CD Phi December 2, 2009 at 6:19 pm

I like the idea of starting a business on the side. Great tips, thanks.

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Financial Samurai December 3, 2009 at 10:09 am

I LOVE real estate here. I’ve been scowering the Nevada side of Lake Tahoe for a vacation/rental prop. Gosh bless America for the opportunities given, b/c things are back to bull markets, and real estate lags.

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Credit Card Chaser December 3, 2009 at 5:07 pm

Also cash flow generating domain names are a good type of “online real estate” to consider that meet some of the same objectives as physical real estate. Or at least that is what that guy says in that guest post over on your blog: http://www.financialsamurai.com/2009/12/02/domain-name-investing-101-online-real-estate-as-an-asset-class/ – Joel :)

PS I love the graphic used in this post.

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Making A Will December 3, 2009 at 12:07 pm

Buying real assets is the classic way to avoid inflation. Going for government indexed bonds and similar instruments add diversity and can make a portfolio safer but they only go so far in protecting against inflation because they will reach maturity at some time and will need replacing.

Property, precious metals, businesses and art are all examples of this approach. And who uses this method? They very rich. Look at families that owned wealth 100 or 200 years ago and who are still rich and what do they own? Real assets.

Regards,

John

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Alan Spiegelman December 4, 2009 at 7:51 am

Great topic. These days, inflation is a significant cause of concern for many investors. Rising prices put pressure on people’s cash flow, and inflation can eat into their investment returns. There are several ways to neutralize the effects of inflation. But no matter what people decide, an important thing to remember is to maintain a diversified portfolio and always consider long-term goals. It’s a good idea to make sure that any moves align with their long range financial objectives and their risk tolerance. Investment strategies shouldn’t be linked to emotional reactions. If I want to laugh and cry, I’ll go to the movies.

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Frugal Francis December 4, 2009 at 8:23 am

Hey found an interesting article on being a landlord… Still think it is an interesting article even though it is mostly about the distressed market in Detroit….

http://money.cnn.com/2009/10/16/real_estate/Real_estate_bargains.moneymag/index.htm

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GE Miller December 5, 2009 at 10:00 am

Right now is a particularly good time for real estate investment because everyone is so down on the market. Precious metals have skyrocketed in price and it seems like a bubble that is going to burst sooner or later.

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Menandro December 6, 2009 at 12:01 am

This is great information and I would also recommend this to my followers. Thanks for bringing value to the internet. More power to you Scott.

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@ScottBradley December 6, 2009 at 7:39 am

You are so welcome Menandro.

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Interview Tips December 11, 2009 at 3:47 am

inflation is not coming to control, in this situation you valuable tips will save our pocket, thank you

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skintology December 11, 2009 at 3:50 am

good information on investment, more valuable tips for investers.

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Transportation to airport CT January 27, 2010 at 5:35 am

Right information to earn money in right way.

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Vitamin D Deficient April 16, 2010 at 7:03 am

GE Miller may be right about it being a good time to invest in real estate. However, it is not for the fainthearted.

Please, think very carefully about any type of investment especially one that is so difficult to sell when the market is slow. It can be extremely frustrating to have cash tied up in property and be unable to access it.

Good luck with your investments. Kind regards, John

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acne August 4, 2010 at 3:25 am

I love TIPS, since it’s so easy to buy with ETFs now. I highly recommend it if you are looking for a straight play on rising inflation, as everything else is not as pure.

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Prasanna August 30, 2010 at 6:59 am

Very nice tips. Now the real estate business is in fallen stage. so i think we can invest. What about gold?

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kyrilloz November 19, 2010 at 6:25 am

Any thing that appreciates in value when the money supply increases is good. Cash in the bank except enough for an emergency, is a poor way of outwitting inflation. Right now the FED is in the process of igniting inflation with further qualitative easing (buying US Government Debt with funny money).

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Michael May 6, 2011 at 8:35 am

Your tips are quite good, but I would be very cautious about direct investing in metals. Silver has crashed about 30% this week and gold is not far behind it.

I would suggest if you would like to invest in metals, it would be better to get a discount stock broker and invest in some mining companies that produce the commodity. Here is a good place to go looking for a discount stock broker: http://www.learntotradestocks.org/discount-stock-brokers.html

I think this is a better solution that keeping a few bars of bullion under the mattress.

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don July 13, 2012 at 6:58 pm

If you are from the US or European countries, invest your cash in Asian stocks where the economy is insulated from the economic downturn of the West. If you are adventurous enough, pack your things and relocate in Asia where you can get the best of your money’s worth while sipping juice and enjoying local massage under a coconut tree in the best beach in the world. How’s that to avoid inflation?

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