When the word inflation starts hitting the news, people have a reason for concern. Inflation means that your dollar will buy less than it did a year ago—possibly even just a couple of months ago. Although some amount of inflation is considered normal and possibly even beneficial in a market-based society, a high rate of inflation is a different matter entirely.
Right now we’re facing that latter situation. Accoding to U.S. News and World Report, inflation has risen this year by 1 percent each month, and has risen 8.6 percent over the past year. Although some prices, in categories such as electronics and apparel, have dropped, other prices rose enough to counter the overall effect.
MarketWatch says that at the current rate of inflation, any cash you have will erode to about half its value in nine years. This makes it very important to have investment inflation hedges in place to protect your savings.
Interest Rates: the Key to Successful Inflation Hedging
If you already have investments or want to make new ones, it is important to check your current rate of return. Fidelity advises that successful inflation hedging can only take place when the potential interest on investments is at or above the current inflation rate.In the current situation, it will not be easy to find investment sources offering interest rates higher than the inflation rate. But there are a few ways to protect your hard-earned savings from being eroded by inflation.
Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) are securities purchased from the government that come to maturity in 5, 10, and 30-year terms. TIPS are sold in $100 increments. The Treasury Department pays interest on the amount twice a year and returns the principal at the end of the term. The principal is adjusted based on the consumer price index, which means it increases with inflation, but will decrease during deflation. However, if deflation occurs, you will not receive less than the original stated value of your investment when it matures.TIPS are auctioned off by terms, with 5-year TIPS being auctioned off in different months than 10-year TIPS or 30-year TIPS. However, the schedule is flexible—set only days before the auction takes place. People interested in buying TIPS can get an email notification of the auction date by signing up for Treasury Department emails.
‘I’ for ‘Inflation’
I bonds are another good investment during times of inflation. I bonds are issued by the Treasury Department and earn interest for 30 years—unless you cash them out before that time.These bonds are designed to protect your money from inflation by giving you an interest rate that is a combination of two types of interest rates: a fixed rate and a derivative inflation rate. I bonds maintain the fixed rate they were issued under for their lifetime (of up to 30 years). The derivative interest rate is based on the current inflation rate and adjusted twice a year, based on consumer price index data from the Bureau of Labor Statistics.
Looking at the current combined interest rate on I bonds—9.62 percent—it’s easy to see why they are a good way to hedge against inflation.
You can purchase I bonds online for as little as $25, up to a maximum of up to $10,000 in electronic I bonds; or, if you buy paper bonds, a maximum of $5,000. Additionally, you can choose to receive up to $5,000 of your tax refund in I bonds, bringing the maximum you can buy up to $15,000.
The interest accumulates until you cash in the bond—and you will receive the principal plus interest. The interest is taxable on your federal tax forms, but I bonds are not subject to state or local taxes.
I bonds can be purchased online through TreasuryDirect, payroll deposit, and mail when filing your federal tax return. You can cash in I bonds at any time after one year, but you will lose the last three months of interest if you cash them in before five years.
EE Bonds
Another investment vehicle for your savings, offered through Treasury Direct, is EE bonds. The difference between I bonds and EE bonds is the end result. EE bonds earn a fixed rate of interest (currently 0.10 percent), and regardless of rate, guarantee that their value will double within 20 years. I bonds, on the other hand, only grow at the rate of inflation—which is variable—and are not guaranteed to double in value.Real Estate Investment Trusts (REITs)
You may also want to consider adding Real Estate Investment Trusts (REITs) to your portfolio. REITs are companies that own or finance real estate that produces income. A REIT enables people to profit from real estate without actually owning it. The companies that own the real estate have a legal obligation to pay a minimum of 90 percent of their taxable income to their investors annually, in the form of dividends.Investopedia reveals that REITS have historically proven to be the best kind of asset class you can possess. This real estate inflation hedge had an average annual return of 9.5 percent interest between 2010 and 2020. For three years, from November 2017 to November 2020, REITs had an average interest rate of 11.25 percent—whereas the S&P 500 had an interest rate of 9.07 percent.
High-Yield Savings Accounts
The average traditional savings account offers less than 1 percent interest. In fact, the national average annual percentage yield (APY) on savings accounts is 0.07 percent. A high-yield savings account can give you more than 10 times that amount.Online banks often offer the highest rates when it comes to high-yield accounts. Many high-yield savings accounts often have minimal features, and it may be harder to access your money than it would be at a brick-and-mortar bank. However, like traditional savings accounts, high-yield savings accounts are FDIC-insured.
Another major plus is that high-yield savings accounts frequently have no (or low) maintenance fees and no minimum balance requirements: all it takes is a dollar to open some of these accounts, and you may be able to start earning interest with as little as a penny. CNBC has rated the Marcus by Goldman Sachs High Yield Online Savings account as the best for June 2022.
Certificate of Deposits
Certificate of Deposits (CDs) do not typically offer high-interest rates, but some are better than others. When buying CDs during times of inflation, it is better to buy short-term CDs of one year or less—enabling you to reinvest elsewhere if interest rates spike.Keep a Cash Cushion
Although cash is not hedged against today’s high inflation, you should still keep some cash handy. You may need emergency cash at some point and you will need easy access to it. Keep an emergency fund (generally three to six months’ worth of expenses) available in checking or savings to provide some immediate financial protection. Then, invest the rest of your money as a hedge against inflation.Diversify Your Investments
With the stock market highly volatile right now, it is hard to predict which assets will perform well in the next year or so. To successfully ride out this unpredictable market, experts recommend that you diversify into a wide range of assets, including TIPS, I-bonds, stocks, commodities, and real estate.The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
