Inflation-Busting Tips

Rising inflation has been a major concern over the past few years. The real value of your money can be quickly eroded if the interest on your accounts fails to keep pace with the rising cost of goods and services. So what can you do about it? Here are some Inflation-Busting Tips to help with your investments:

Inflation “The Silent Thief”

Price Inflation is the measure of the rising costs of goods and services across a period of time, also described as the “rising cost of living”.

Sometimes described as ‘the silent thief’, savers are often left unaware of the effect that inflation is having on their savings. While you may not physically lose money as a result of rising inflation, the real value or “buying power” of what is in your bank account could be eroded, so it’s important to ensure that the interest rate that you earn outstrips inflation even after you have paid taxes on the interest gained on your money.

Inflation Simplified

Imagine your weekly shopping cart full of food. If over the course of a year, the cost of the contents of that cart rises by 3%, what you could purchase for $100 a year ago now costs $103. In terms of food shopping $100 has lost 3% of its “buying power” so your $100 will be worth less in real terms.

Inflation isn’t just measured according to the price of food alone of course , but also according prices of other consumer goods and services purchased by households. National rates of inflation are measured using the Consumer Price Index (CPI) published by the U.S. Bureau of Labor Statistics.

With the FED pushing down interest rates, obtaining an inflation beating interest rate can be tough, so here are a few tips to help you get the best possible rate for your money:

Foregoing Easy Access

Generally speaking, the easier the access to your money that you want to maintain, the lower the rate of interest you are likely to be offered. If you are prepared to lock your cash away for a fixed period of time you may get an inflation beating rate, whether you choose a long-term savings account from a bank or fixed rate bond option from a broker. Durations tend to range from 6 months all the way up to 10 years.

It’s important to remember that you should only lock money away that you can afford to forego access to, as many account will charge early withdrawal fees if you choose to opt out before the end of the term which was originally agreed.

Locking your money away will also mean that you are committing to a particular rate of interest, so it’s worth noting that what may seem like a competitive interest deal now may not seem quite as competitive at the end of the term. As with many financial matters there are likely to be both pros and cons involved, it’s up to you to weigh them. You may also want to consider investment options such as stocks, shares, bonds, and Mutual Funds. These can deliver a higher level of interest, but require thorough research to ensure that you’re comfortable with an added level of risk.

Editor’s Note: Another advantage of locking in an interest rate and locking up your money is that you are less likely to dip into these monies for frivolous reasons. But the money is available for emergencies if you are willing to pay the penalty.

One common method of addressing this concern is by “laddering” your investment. In laddering rather than investing your money all at once you invest a portion at regular intervals. Suppose you were considering investing $12,000 in a bank Certificate of Deposit (CD) for one year. You could instead invest $1,000 in a new CD every month. At the end of the year you reinvest the expiring CD into a new one. That way you always have access to a portion of the money (within the month) and you can renew at the higher rate of interest. Of course if interest rates are headed down this will work against you as you want to lock in the higher rate for longer periods. In that case you may choose to invest in 5 – five year CDs at annual intervals. Tim McMahon~ editor

Shop Around

If you’re thinking of pursuing a higher rate of return through options such as IRAs in the U.S. or ISAs in the U.K., fixed rate bonds, investment opportunities or anything in between, you may wish to seek professional advice to ensure that you get the best deal. In this economic climate it is important that all decisions you make about financial products are well-informed and well-suited to your needs.

Keeping tabs on your savings can ensure that you’re receiving the most competitive interest rate on the market that isn’t slipping behind the current rate of inflation. It’s important not to let your money languish or you could lose out.

About the Author:

This post was written by John Hughes who is the resident blogger at http://www.yourwealth.co.uk/, a UK-based site that provides access to financial information and advisors as well as debt advice charities for those struggling with their debts.