How to Beat Inflation and Protect Your Wealth

Is inflation eating your savings alive? You don’t have to let it win.

Learn practical ways to outpace inflation and keep your money growing, starting now.

Understanding Inflation

What is inflation ?

Inflation represents the rate at which the purchasing power of currency declines over time. When prices rise, each dollar buys fewer goods and services than before.

Why Inflation Matters ?

• At 3% annual inflation, money loses half its purchasing power in about 24 years.

• At 7% inflation, purchasing power is cut in half in just 10 years.

• Cash and fixed-income investments often fail to keep pace with inflation.

• Retirement planning becomes drastically more difficult without accounting for inflation.

Types of Inflation to Prepare For

1. Consumer Price Inflation: Increases in everyday goods and services.

2. Asset Inflation: Rising prices of real estate, stocks, and other investments.

3. Sector-Specific Inflation: Particularly in healthcare, education, and housing.

4. Monetary Inflation: Expansion of money supply potentially leading to price increases.

How is Inflation Calculated ?

Inflation is measured using two indices: the consumer price index (CPI) and the wholesale price index (WPI).

These two indexes gauge the inflation rate at the consumer level by looking at expenses like food, education, medical care, electronics, and other routine costs that a typical consumer would incur, along with the wholesale cost of goods sold in bulk to retailers and vendors.

The CPI accounts for 260 items. It does so by monitoring the price of sample products on a monthly basis to trace changes in prices.

WPI considers 697 commodities. They are raw materials, finished goods, and fuel and energy. The Ministry of Commerce and Industry fixes an overall price on a monthly basis to calculate the WPI.

Best ways to beat Inflation with Investments

1. Equity-Oriented Investments

In the long term, stock markets have outperformed inflation. But in the short run, there are numerous fluctuations and volatile periods. Consider the case of years 2020 and 2021. Sensex touched 25,000 in March 2020 from about 40,000 in January 2020. In the year 2023, Sensex has already surpassed the level of 60,000.

Sensex, over 5 years, has delivered more than 88% CAGR up to April 15, 2021. Performance of individual stocks could be different from the benchmark index performance.

It indicates that stock markets recover in the long term. Risk and loss balance out. Research-oriented and target-based stock market investment can neutralize inflation.

2. Equity Mutual Funds

Investors who do not wish to invest in direct stocks can consider equity mutual funds. Various subsegments within equity funds can cater to the needs of various types of investors.

Equity funds with a focus on market capitalization, sectoral funds, equity funds with a focus on investment strategies, tax-saving funds, etc., are some examples.

5- and 10-year returns of most categories of equity funds were more than 10% as of April 2021.

3. Gold

Gold is regarded as a 'safe haven' by global experts. It is taken as a hedge against inflation due to the fact that the rise in gold prices and the yields thereon have neutralized inflation in the past. Gold is a physical commodity and not a paper asset.

According to a study by World Gold Council, there is a 2.6% increase in demand for gold due to a 1% inflation increase, and an increase in demand for nearly anything results in a hike in prices.

4. Real Estate

The returns have been approximately 9% from real estate investment over the past ten years, according to some media reports as well as real estate agency research studies released in India. It does, however, involve significant capital outlays, in a couple of lakhs or crores.

As per RBI's House Price Index, which takes prices of real estate in ten cities, the average return from holding Indian real estate in the last decade has been approximately 9% until 2023. But in actuality, returns can vary from city to city since levels of property prices are largely geography-dependent.

The returns could have outrun inflation. Yet, there is a lot to keep in mind about real estate.

To start with, the cost of buying into real estate can be enormous, and the majority of us will have to borrow in order to invest in real estate. The returns must, therefore, pay you back for the loan interest you incur and all other other expenses that you've incurred in order to acquire the property in the first place.

5. Rebalance Your Portfolio

Portfolio rebalancing is shifting the assets within your portfolio based on market conditions in the long term.

Drastic changes in inflation rates, investment objectives, and numerous other reasons can make you rebalance your portfolio.

For instance, a portfolio you have developed in 2015, taking into account the economy and inflation levels, might not suit you in 2023. Therefore a crucial part of hedging your portfolio against inflation is to review your portfolio and change it only if necessary.

Other ways to beat Inflation

1. Optimize Debt and Leverage

• Fixed-Rate Mortgages

  • Inflation Benefit: Repay loans with less valuable future dollars

  • Strategy:

    • Lock in long-term fixed rates when inflation is expected to rise

    • Avoid adjustable-rate products during inflationary periods

    • Consider refinancing to fixed rates before inflation spikes

• Debt Cautions

  • Ensure cash flow can handle payments regardless of economic conditions

  • Avoid high-interest consumer debt even in inflationary environments

  • Consider inflation-adjusted debt-to-income ratios in planning

2. Develop Inflation-Resistant Income Streams

• Adjust Income Sources

  • Employment: Seek positions with automatic cost-of-living adjustments

  • Business Ownership: Build businesses with pricing power

  • Side Hustles: Develop skills in demand during inflationary times

• Create Adaptable Passive Income

  • Rental Properties: Include inflation escalators in leases

  • Royalties: Negotiate percentage-based rather than fixed payments

  • Business Investments: Focus on companies with inflation-adjusted revenue models

• Social Security Optimization

  • COLA Advantage: Social Security benefits include cost-of-living adjustments

  • Strategy:

    • Consider delaying benefits to maximize inflation-adjusted lifetime payments

    • Coordinate with other income sources in retirement plannin

Conclusion

Inflation’s a thief, but you can outsmart it—invest smart, earn more, spend less, and watch your wealth grow.

Disclaimer: The information in this article is for educational and informational purposes only and does not constitute financial or investment advice. Strategies to combat inflation and protect wealth are general suggestions and may not be suitable for everyone, as individual financial situations, market conditions, and inflation rates vary. Past performance of investments or assets is not a guarantee of future results, and all investments carry risks, including potential loss of principal. Readers should consult a qualified financial advisor before making decisions based on this content. The author and publisher are not responsible for any losses or damages resulting from its use.