Inflation is one word that terrifies us. This fear stems from the fact that everything will be more expensive, and we will have to take more money out of our pockets as a result.

 

Inflation makes us spend more on the usual goods and services. After paying our normal expenses, we will have less money left over.

 

What is even more frightening is that if we try to save our money during this period, we’ll still be losing out. Inflation will erode any interest that we collect from our savings, and it will also eat away at the returns on any investments that we make.

 

This also forces us to tighten our budget and find ways to make more money.

 

Do you find yourself wondering if it is possible to make or save money during inflation?

 

The answer is yes! It’s absolutely possible to do both! It’s so necessary to make money more than ever and protect your wealth during these tough times!

 

Prices are soaring. This leaves us in distress. Hell, like everyone else, I’m even worrying a lot about how I need to adjust my finances. We all get this negative feeling when we watch the financial news and see that the Feds continue to raise the market rate.

 

It is not fun to worry about the economy, but we need to protect our money and assets now more than ever.

 

Inflation is a problem for everyone, whether you are a consumer or a business owner.

 

We track the inflation rate with the Consumer Price Index (CPI).

 

We know the Federal Reserve changes the interest rate to either speed up or slow down the economy. The problem is that we cannot always predict the exact direction the Fed will go.

 

A good target range for the inflation rate is between 2% and 3%. The annual average inflation rate is 3%, but the Federal Reserve likes to keep the rate at 2%.

 

The 3% inflation rate per year slowly reduces the buying power of the dollar, causing more devaluation of the currency.

 

To have a stable economy, the Fed tries to keep a balance between inflation and deflation. We already know what inflation is, but what is deflation? Deflation occurs when prices drop to the point that the inflation rate is below 0%. For instance, when inflation falls from 4% to -0.1%.

Now if the rate simply went down from the previous period, such as from 5% to 4%, then that would be disinflation. Disinflation occurs when the inflation rate decreases but does not reach a negative percentage like deflation.

Disinflation, on the contrary, is when prices are increasing more slowly. People often confuse disinflation and deflation.

The Federal Board of Governors has been able to keep inflation at bay for the time being, but it is uncertain what the future holds for all of us since there are talks about chronic hyperinflation.

 

When there’s inflation, businesses will slow down. Sure, that can have a negative impact on businesses, but the most important thing to worry about is how inflation will affect the economy, our money, and other assets.

 

Good news: You can greatly protect your finances from inflation, and I’m going to tell you how. 

 

The Great Depression will not save any of your money held in equities (stocks). Even if the economy recovers from that, it will take a long time to recoup your losses.

 

The following are good assets to hold when inflation is rising. Our focus is on the assets that will be valuable if inflation continues to rise.

 

 

 

 

1. Treasury Inflation Protected Securities (TIPS) Bonds

 

 

TIPS are inflation-indexed bonds. That is, their value follows the rate of inflation, which allows your investment to successfully compete with and even outpace inflation. They also have a fixed interest rate.

 

Unlike most bonds, the principal amount and coupon payments are variable. Instead of the face value, the market value reflects coupon payments. The adjusted principal amount determines your interest.

 

The amount of the coupon payment depends on the inflation rate. Inflation also affects this bond’s market value.

 

For instance, let’s say inflation is at 5%. This will move your $1,000 TIPS holding up to $1,050. That 5% inflation rate increased the bond’s value by $50. The market price changes every 6 months, and so do your interest payments as you’re receiving interest twice a year.

 

If your TIPS coupon rate is 2.5%, rather than receiving $25 annually ($12.50 a period) from the $1,000 value, you would receive $26.25 per year ($13.13 semiannually) from the $1,050 price. Despite the fixed coupon rate, your interest payments vary. The inflation rate impacts the market value and periodic interest amount.

 

Suppose that inflation decreased by -2%, which would be deflation in this case. Assuming a 2.5% interest rate, your $1,000 TIPS would be worth $980, reducing the interest to $24.50 per year ($12.25 per period).

 

Prices rise with inflation and disinflation. Deflation lowers prices. TIPS is the perfect investment when you anticipate a rise in the inflation rate.

 

You receive the greater amount between market value and face value at maturity. If they are both equal ($1,000), you’ll get the face value. In the event that the bond’s market value is $1,050 at the maturity date, you will be paid out $1,050 instead of the $1,000 face value. 

 

The par value is either $100 (through Treasury Direct) or $1,000 (through a broker).

 

These debt instruments have 5, 10, and 30-year maturities.

 

2. TIPS mutual funds

 

So, you don’t have a lot of cash on hand to buy the TIPS issues. There is, however, another way to enter the TIPS market without putting up a large sum of money.

 

You can invest in mutual funds that hold TIPS in their portfolios. That’s right! There are funds out there that pool the money of many investors to buy these inflation-indexed securities.

 

Investors would benefit from not being tied to a maturity date. These funds hold various bonds with different maturities.

 

The fund’s manager also collects the interest from the securities and gives it to the shareholders in the form of dividends. In addition to the periodic dividend income, shareholders can receive profits when redeeming their shares.

 

Like any mutual fund, the investor has no say in how the fund uses his or her money or what securities he or she buys. Since the portfolio manager will buy the assets with pooled money, the investor must trust the manager’s decisions.

 

The drawback to investing in a TIPS fund is that it’s very susceptible to interest rate risk. This fund’s Net Asset Value (NAV), or price per share, will fall as the market rate rises because these bonds have fixed interest rates. Interest income is contingent on inflation, and the coupon rate is usually low.

 

If inflation rises, the TIPS market value will rise, and vice versa.

 

You must pay taxes on dividends and capital gains, but if you hold TIPS fund shares in an Individual Retirement Account (IRA), you can defer the tax payments.

 

3. Series I Bonds

 

I Bonds are inflation-indexed like TIPS. These are great investments, especially during hyperinflation. 

 

You only need $25 or more to buy an issue. This security’s interest is compounded twice a year, every six months.

 

For instance, if you invest $25 in an I Bond with a 5% annual rate, you will get $1.27 in interest after a year. The total value then would be $26.27 ($25 + $1.27).

 

We compute this by $25 × [1+(0.05÷2)] × [1+(0.05÷2)] = $26.27. Since the interest accumulates twice a year, we multiply [1+(0.052)] twice. Then, we subtract $26.27 from $25 to get $1.27 in interest.

 

These bonds have a 30-year maturity date, but you can redeem them after a year.

 

If you cash them in within 5 years, you lose 3 months’ worth of interest. Of course, you keep all of the interest you have earned if you redeem the bond after 5 years or more.

 

You will only get 33 months of interest after holding the security for 36 months. If you liquidate the issue just after a year, you’ll collect only 9 months of interest instead of 12 months.

 

In our previous example, where you earned $1.27 on a $25 investment, you would have to hold the security for exactly 15 months (1 year and 3 months) to collect 12 months of interest. Remember that you lose 3 months of interest when you redeem the issue within 5 years.

 

If you redeemed the bond after a year, you would only get 9 months of interest. Interest would be $0.94 rather than $1.27. The early withdrawal here cost you $0.33 more in interest.

 

Like any investment, the more you spend, the more you make.

 

These bonds’ coupon rates rise with inflation and exceed it to provide real returns to investors.

 

When inflation was 8.2% in September 2022, the I Bond’s rate was 9.62%, giving investors a real return of 1.42% (9.62% minus 8.2%).

 

In May 2023, inflation fell to 4.05%. Thus, the I Bond’s coupon rate fell to 4.30%, yielding a 0.25% real return for the bondholder (4.30% minus 4.05%). 

 

The difference between the annual return and the inflation rate is the real rate of return. The annual return, in this instance, is the interest rate.

 

The interest rate changes every 6 months. You could argue that the interest rate on I Bonds is a good way to measure inflation.

 

The catch is that the interest rate is fixed. You will have to purchase a new issue if you want a different or even higher interest rate than the one you currently have. Keep in mind that higher inflation causes rising rates.

 

When inflation rises, you can buy more bonds at higher rates. This is also a good investment if you think inflation will go down, and you want to take advantage of the high return that comes with high inflation. That way, you can lock in a high interest rate before market rates drop.

 

Interest comes every six months. Your I Bond has a fixed rate, but this bond’s interest rate changes twice a year on the market. Since these bonds’ rates are fixed, you will have to buy more to get a higher rate.

 

The interest is exempt from state and local taxes! Unfortunately, you still must pay the federal taxes! Yet, you only pay the federal tax when you redeem the bond.

 

You can only buy these savings bonds through the Treasury Direct website: www.treasurydirect.gov

 

4. Floating Rate Notes (FRNs)

 

What are FRNs?

 

They are Treasury Securities with a variable interest rate that changes every six months. 

 

The Fed’s Funds Rate, our main market rate in the U.S., and the London Interbank Offered Rate (LIBOR), which financial institutions worldwide use to set loan interest rates, affect the FRN’s interest rate. 

 

FRNs are also known as “floaters” and “variable-rate notes.”

 

Inflation raises FRN coupon rates, as you probably expected. The Fed raises the benchmark rate to ensure a recession since inflation already slows down the economy.

 

FRNs help fight inflation and preserve your money’s spending power.

 

These notes have 2- to 5-year maturities and pay interest quarterly or semiannually, depending on the issuer.

 

Just like TIPS, you can find FRNs through Treasury Direct with a $100 face value or a $1,000 par value with a broker.

 

If you buy a $100 “floater” now at 4% (1% quarterly), you will receive $1 this period ($4 annually). You will get $1.25 ($5 annually) if that coupon rate jumps up to 5%.

 

5. Corporate Inflation-Linked Bonds

 

There are corporate bonds that adjust to inflation. Traditional corporate bonds have a fixed coupon rate which can work against an investor if the market rate rises.

 

Why buy the Corporate Inflation-Linked Bonds over the regular Corporate Fixed Securities?

 

Corporate inflation-linked bonds generate returns when market rates rise with inflation. 

 

These bonds have 5- to 10-year maturities and are subject to interest rate risk.

 

Due to default risk, corporate bonds yield more than Treasury bonds. Therefore, these issues will have higher coupon rates. This contrasts with Treasury securities, which are risk-free.

 

Traditional Corporate Bonds lose value during inflation due to their fixed interest rates.

 

So, we need to find a way to hedge against inflation. The solution for this would be to purchase the Corporate Inflation-Linked Bonds.

 

Similar to TIPS, the interest payments on these bonds depend on the rate of inflation and change over time.

 

The difference is that Corporate Inflation-Linked Bonds pay interest monthly. The interest rate and coupon payments adjust monthly with inflation and the CPI. As a result, you will probably collect different amounts each month.

 

Interest from these securities is subject to federal, state, and local taxes.

 

Though rare, these issues occur mostly in banks and other financial institutions. Only a small number of them are available.

 

If you’re able to get this security, you can also sell it on the secondary market.

 

6. Gold

 

Inflation devalues the dollar. When devaluation happens, people lose confidence in the dollar.

 

Thus, they must turn to another currency that will rise in value during the period of inflated prices.

 

And gold is one of the trusted currencies that appreciates in value during inflation. Gold’s price rose over 105% from 1929 to 1939 during the Great Depression. 

 

Gold lost value before the Great Depression because people preferred the dollar. There were more dollars than gold. In 1914, the year the Fed introduced the dollar, gold’s value began to decline.

 

The Gold Reserve Act of 1934 banned U.S. citizens from owning gold until almost 1970. This is to reserve gold since there was a limited supply for the public.

 

In the 1970s recession, gold’s price surged to just over 807%.

 

During the 1970s, the dollar lost its gold backing. Due to the growing use of U.S. Dollars, gold temporarily lost value. Gold prices rose exponentially as inflation, recession, and foreign trade deficits hit the U.S. around that period.  

 

The value of this precious metal increased by more than 75% a few years after the 2008 financial crisis.

 

And during the COVID-19 recession, it went up by around 22%.

 

People expect the dollar to lose value over time.

 

Gold’s scarcity and stability make it valuable. 

 

There are various ways to invest in gold:

• Gold Bullion and Coins
• Gold Stocks 
• Gold ETFs
• Gold Futures
• Options Contracts for Gold Investment Products

 

7. Other commodities

 

What are commodities?

 

They are items of agriculture and raw materials that we buy and sell. These include metals (gold, silver, copper, etc.), energy (gas, oil), crops (cotton, corn, soybeans, wheat, etc.), livestock (pork, beef, milk, etc.), and other foods (cocoa, coffee).

 

Commodities are goods we consume daily, let alone need.

 

Do commodities protect against inflation?

 

Absolutely! Inflation means that the prices of goods are going up. Commodities are goods, so inflation will raise their value.

 

We previously discussed gold’s inflation-fighting capabilities. Gold is a commodity, and when prices go up, other commodities will likely be worth more. 

 

You can make commodity investments through Exchange-Traded Funds (ETFs) or futures contracts. Always do your homework before investing in a commodity. 

 

8. Real Estate

 

Real Estate is the perfect investment to fight inflation.

 

Why is that?

 

For starters, everybody needs a place to live. So, the demand to find and buy a place will never go away.

 

Also, housing prices rise when there is inflation. 

 

This type of asset will always be valuable, and as inflation gets worse, home prices will continue to rise.

 

If your property has appreciated significantly since you bought it, you may want to sell it.

 

Now more than ever, you need to find ways to make additional money because everything is getting very costly. So, why not invest in an asset that will be more valuable when prices go up?

 

The best time to sell the property is right before the Feds begin raising the market rate. This will be the period when the inflation rate is rising, and the Fed has yet to raise the market rate even though there is talk about it in the financial news.

 

If you own rental property, you can raise the rent. Remember, with inflation, everything goes up including your income and expenses.

 

The CPI and inflation rate can give you an idea of real estate prices if you study the economic measures.

 

Let’s figure the price of a small home if the CPI was 100 in 1983, 350.489 in 2022, and 378.622 in 2023.

 

A small home valued at $60,746.60 in 1983 was worth $213,153.74 in May 2022 and $230,000.00 in May 2023. Inflation was just over 8% from May 2022 to May 2023.

 

But do you see how these housing prices have ballooned?

 

What makes real estate unique is that it is both a product of consumption and an investment tool, unlike other assets. Real estate prices rise during inflation along with consumer goods.

 

Though real estate is not a commodity since it is a shelter, it does behave like one.

 

9. Real Estate Investment Trusts (REITs)

 

There is a way to gain access to the real estate market without spending huge chunks of money.

 

You can invest in REITs. These are mutual funds that invest in the real estate market. 

 

Essentially, a REIT is a company that pools multiple investors’ money and buys properties or invests in mortgages while distributing the returns to the fund’s shareholders. 

 

These funds trade publicly like ETFs. They have grown in popularity, especially among small investors who want to enter the real estate market.

 

There are 3 main types of REITs that investors can choose from. 

 

First, there are equity REITs in which the company uses the pooled funds to buy and own property. Instead of keeping all of the monthly rent, the company distributes the majority of rental income to its fund’s shareholders.

 

Second, there are mortgage REITs, in which the company uses the money from investors to give loans to building developers and mortgage lenders. The company collects interest from loans and distributes it monthly to shareholders.

 

Finally, there are the hybrid REITs which are a mix of equity and mortgage REITs in one fund. The company will simultaneously invest in loans and properties in this case. As a result, shareholders will collect monthly income that will come from rent and interest.

 

REITs generate high returns and provide consistent income. 

 

Sadly, they never pay qualified dividends. So, you won’t be able to enjoy tax advantages from this type of income. However, these funds trade like ETFs on a public platform, making them highly liquid.

 

10. Cryptocurrency

 

All of us have heard about the crypto markets.

 

One of the main issues with cryptocurrency is the level of uncertainty. Because the price changes every minute, we do not know how many dollars make one Bitcoin.

 

Many people do not think these coins will be worth much in the future, but others think their value will go up by a lot because of hyperinflation.

 

The rising inflation rate boosted the crypto market. When there were large bank runs during the banking collapse in early 2023, this sparked the crypto market.

 

To fight inflation, crypto was created as a decentralized currency system.

 

However, many people believe a digital fiat currency will be the next best asset created.

 

Some people say the dollar will not be worth much in many years. So, many investors are buying these digital coins along with gold and silver as a form of financial protection.

 

For now, crypto is deemed a very risky asset. If you choose to invest in these coins, I suggest buying them in small batches.

 

It’s best to employ dollar cost averaging when you invest in this asset class. This is when you add small amounts of money on a regular basis to any asset class, such as your 401(k), stocks, etc.

 

Since this is a risky asset class, only invest money you are willing to lose. (Of course, you should always invest with money you do not need because you are taking a risk.)

 

In my opinion, the best way to invest in crypto is to buy Bitcoin and Ethereum when inflation and market rates rise during an economic recession. 

 

If you are unsure or expect the market to rise, buy stablecoins Gemini Dollar and Tether Dollar.

 

You can also gain interest while holding any of the crypto coins. This is when you stake the coins, or request to receive interest while holding them for a specified period of time.

 

It’s just important to choose a good crypto platform. I believe that Coinbase is a great platform because it offers various coins there. You can also stake the coins that you’re holding in your portfolio.

 

You can also use well-known platforms such as PayPal and Fidelity even though there are limited options of coins to choose from. These platforms also do not let you stake these coins to get rewards.

 

When you own these digital tokens, make sure you use the crypto wallets or ledgers so the coins are officially yours.

 

In conclusion, one thing you must consider when you invest in these assets is that they’re not as valuable when the inflation and market rates go down. That is why it is crucial to research the economy before making a decision.

 

You can buy the different Treasury securities on Treasury Direct or through a broker, but you can only buy the Series I Bonds on Treasury Direct.

 

When you buy and hold Treasury Securities, you have to trust that Uncle Sam will not stop paying its debts, or else you may not get your money back. I say this due to discussions over raising the debt ceiling.

 

At the end of the day, you want to protect your money’s purchasing power from inflation. Some of the best ways to do this are to invest in the asset classes mentioned.

 

If market rates fall, fixed-rate securities are the better alternative.

 

Inflation-driven investments were the main focus of this article.

 

If you want to know what investments to make during a recession but expect a bull market, read this article here. 

(If you click on these links, I won’t make any money. These links are for your own benefit.)