Saturday, January 22, 2011

How can We Cope with Inflation ?

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money

Inflation is here. We just can’t stop it.
Here are some strategies that you can put into immediate action.

Watch your personal inflation rate

A general inflation rate is published every year by the government but that is based on some daily use items and control materials. The fact is that every one of us has a different set of inflation rate. Just take a look at how much you are spending every year and you will most likely find that your expenses keep increasing at a much higher rate, regardless of the official rate.
When your income increases, you elevate expenses almost immediately. You may get a brand new car, get married, got kids and all these total yearly expenses always exceed the official inflation rate.
The more to worry about is your personal actual inflation rate. If you can keep this low, there is not much to worry about the national inflation rate.

Invest in inflation-proof assets

As money being pump into our banking system, which is called the fiat money since the currency value no longer backed by reserves, government is used to printing more money. The most obvious is the major bailout of banks by the US government in the sub-prime crisis. Inflation just happens.
When certain raw material price increases, all related item will appreciate as well. For example, when oil price take a hike, petrol price increases. Transportation fees elevate and all building materials follow suit. Therefore, the price of buildings and houses also go up.
So if your money is still parked at places that remain as fiat money, it unavoidably depreciates. Therefore, it is wise to park your money at places where value appreciates due to inflations. Some inflation-proof assets are real estates, energy-related businesses and commodities such as gold and silver.
When you are investing for inflation, your intention is to protect your wealth from being depleted due to inflation.

Invest for cash flow, not capital gains

When someone says, “The stock I bought is rising!” or “The house I bought two years ago has appreciated more than 30%,” they are aiming to get capital gains from their investments. But when you say, “I got a steady dividend check from the listed company every quarter” or “I receive monthly rental from the tenant”, you are investing for cash flow.
Due to inflation, price of commodities rises, including rental. Some companies can pass the cost hike to their consumers by raising the price of their products – such as milk powder and alcohol. As a result, those companies can still pay you the expected dividends in the midst of inflation. When you are investing for cash flow, your cash flow will actually increase, thanks to “inflation”.

What’s your actual personal inflation rate?

Inflation is one of those investment variables that you can’t control. So rather than whine about the misfortune of higher inflation, focus on things you can control. You can controlwhere you park your money. You can control your own personal inflation rate. While inflation isn’t something to be desired, it’s something you can learn to live with.
Now, tell me what’s your actual inflation rate? Use this formula to calculate:
Actual inflation rate = (E2010 – E2009)/ E2009 x 100%
E2009 = total expenses in 2009
E2010 = total expenses in 2010
Adapted: kclau 2011

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