I’m sure you’ve seen all the talk of quantitative easing after the FOMC announced they’d be buying $600,000,000,000 (isn’t that just an absurdly large number?) worth of assets. You’ve also probably seen a lot of pundits warn that this, along with already low interest rates, puts us in a position of dealing with high levels of inflation in the future. When you increase the money supply, the existing money becomes less valuable.
So how does one protect ourselves from inflation, should it rear its ugly head?
Try to fix as many expenses as possible. One of the great ways to combat inflation is to buy a home because you fix your monthly housing payment. When you sign up for a mortgage, you are agreeing to a fixed monthly payment for fifteen or thirty years (assuming, of course, it’s a fixed mortgage). If that’s fixed at $1,500 a month, then it’s $1,500 in twenty nine years. If inflation skyrockets, your mortgage will still be $1,500 a month.
Invest in assets that are seen as “stores of value.” Gold prices have been increasing in part because the value of the dollar is decreasing. Gold is seen as having an inherent value in any economy, so that ounce of gold has a price in Euros and RMB even if the dollar becomes worthless. What this means is that by putting your money into gold, it becomes immune to the eroding effects of inflation on the US dollar.
Invest in the stock market. As appealing as safe savings accounts are, the higher rates of CDs and savings accounts at online banks can’t beat inflation. When you invest in the stock market, you introduce risk but you also put your money with companies that can respond to higher levels of inflation. This is a bit of a corollary to the idea of investing in stores of value, as shares of stock do have inherent value.
One key point to remember is that while all three of these ideas can protect you from inflation, they introduce other risks. Buying a home protects your housing payment from inflation but it doesn’t protect you from the risk your home may lose value. The stock market may lessen the pain of inflation but it introduces other risks you may not be comfortable with.
Jim writes about personal finance at Bargaineering.com.