Can you beat inflation?

Global inflation is spiking at rates not seen in 20 years, with the cost of living skyrocketing around the world.

Trying to get ahead when inflation is high is like “running up a down escalator,” as Warren Buffett once put it. As an investor, you need to achieve higher after-tax returns than inflation, which is a major challenge when inflation hit 6.2% earlier this year.

Here are five tips to help you minimise the impact of inflation:

1. Invest in yourself

Money you spend upskilling could pay dividends well above inflation. Putting your time into finding a higher-paying job, increasing your marketable skills, starting a side hustle – any of these will help you get ahead at a time when there’s a shortage of skilled workers.

Your brain and your earning capability are your most powerful money-making tools, so don’t undervalue them. Putting money and time into growing your skills could increase your income by far more than 7%. Plus, those gains should compound over the years, giving you long-lasting returns even as inflation returns to a lower level.

2. The gold hedge

There are some investments that are traditionally described as hedges against inflation. Gold is the number one contender, and gold ETFs could be one way to balance out your portfolio. (Owning gold directly presents a series of problems like storage and insurance, but for real goldbugs it’s worth the effort.)   

Bitcoin is seen by some as a modern, digital version of gold. Certainly it shares some of the same features: its value is set by demand, it’s not productive and it’s not necessarily correlated with other investments. But approach with caution. Recent months have seen experts casting doubt on the idea of Bitcoin as digital gold; as one finance writer put it: “Cryptocurrencies are not playing on the same pitch, asset-wise, as gold – and one doubts they ever will.”

3. The upsides of real estate

Real estate is another asset class often seen as a hedge against inflation. Demand is always strong for residential homes, although less so for commercial property. Because rents keep rising as other costs of living go up, property can be a useful hedge.

However, with the rapidly rising cost of borrowing, and tax changes to think about, property has a high barrier to ownership. For a more hands-off approach with a lower cost of entry, you could invest in a first mortgage-backed investment via Zagga. Zagga’s current investments are returning above the rate of inflation, with interest paid monthly.

4. Look for industries which can keep raising prices

Companies that perform well in a high-inflation environment are those that can keep raising their prices in line with the cost of living. With strong pricing power, a business can offset its rising costs. Shares in companies like these, especially in countries where inflation is having less of an impact, can provide higher returns even as costs keep increasing. Buffett gave the example of a toll bridge as the perfect business in times of high inflation, because the bridge is already built and the cost to cross it can just keep going up.

5. Don’t get stuck on the hedonic treadmill

Hopefully this year you’ll benefit from income inflation, which will help you to meet the rising cost of fuel, groceries, and other essentials. If you are earning more, avoid becoming trapped on the hedonic treadmill – where every time you earn more, you spend more, so you’re always staying in the same place.

Think carefully about how you spend any additional income that’s beyond inflation, as well as reviewing your regular outgoings like subscriptions and utilities. The freer you can be from consumer culture, the easier it will be to withstand the pressures of inflation.

Why high inflation won’t last

High inflation is the enemy for central banks – controlling inflation is one of their core responsibilities. The Reserve Bank of NZ, along with its international counterparts, will be working to reduce high inflation – mainly through higher interest rates. We don’t yet know how aggressive the Reserve Bank will need to get, or when inflation will start to come down, but inflation this high won’t last.

Inflation is stressful, but it’s temporary. Remain calm, review your long-term goals, cut your expenses if necessary, and talk to your financial adviser if you’re feeling anxious.

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