5 Ways to Prepare Yourself for the Coming Inflationary Period
- Author: Jeffrey Simmons
- Posted: 2024-06-11
The federal government is pumping trillions of dollars into the economy in order to replace the wide swaths of the GDP that have been destroyed by the pandemic. Of course, this is not money that Uncle Sam has in its accounts. Instead, it is putting it on the national credit card. The deficit has blown well beyond $20 trillion and is skyrocketing. One of the inevitable effects of the spiraling budget deficit is that it will lead to higher inflation. Here are five things that you can do to prepare your personal financial situation for the coming inflation that will hit the U.S. Inflation does not have to cause you financial difficulty.
Sell Your U.S. Government Bonds
Part of the coming inflation may be a measure taken to devalue the huge amount of government debt. Interest rates on U.S. debt obligation are stunningly low right now in part because the Federal Reserve is pumping in trillions of dollars into the economy by buying debt. In an inflationary environment, government bonds are the worst performing investment. Not only will yields rise and prices drop, but your capital will get eaten away by the corrosive effects of inflation. You have multiple ways of losing money when owning bonds in an inflationary environment. The U.S. government has every interest right now in devaluing bonds so be careful viewing these as an instrument of safety right now.
Borrow What You Need to Now
The best time to borrow is when inflation is low. This is when interest rates will be favorable. As a borrower, you will actually fare well in an inflationary environment when you have a fixed-rate loan. This happens for the same reason that bonds are a bad investment. The real value of the principal that you owe will end up taking a hit. As a result, lenders will need to charge you more in order to compensate for the erosion in the value of their capital. Thus, if you think that you will need to borrow in the future, it is better to do it right before a spike in inflation. Banks may be more willing to lend now and will make it more difficult to get credit when there is inflation.
Buy a Home Now
In a similar spirit, real estate is also a strong investment in an inflationary environment. It is a real asset which tends to hold its value even as inflation increases. At the same time, like other debt, the real value of you principal balance will decrease over the years as inflation eats into it. It is important to note that this would not be the time to buy real estate with an eye towards flipping it. Higher inflation means higher mortgage rates. In turn, that means that home values will take a hit. Therefore, you should only be thinking about buying a home for yourself. If you are looking to buy a home as an investment, it may be better to buy after the inflationary period has started.
Make Major Purchases Now
Outside of a home and a car, if you have any major purchases to make, it is best to make them before inflation perks up because you can count on your money being worth less in the future. Any money that you have sitting in your account will simply not be worth the same tomorrow as it is today. While your salary may go up thanks to inflation, your savings will take a hit. If there are any expenses that you can lock in, now is the time to do it. For example, if you are renting anything, now would be the time to switch to ownership.
Buy Stocks
The best performing investment in an inflationary investment is stocks. This is because companies will continue to earn money. In fact, there earnings will likely increase to reflect the higher prices that they are charging. This will end up being factored into the stock price. Inflationary environments can actually be growth periods for stocks. Moreover, if you own a stock that pays a dividend, it will likely raise its dividend to reflect its higher earnings. Stocks and commodities are perhaps the only investments that can grow at a higher rate than inflation. Companies that focus on physical commodities are your best bet because they have the highest earnings during these periods.
