Post-Recession Protection: How to Beat Inflation

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There's been much talk this month about the end of the Great Recession, woohoo! Wait, what's supposed to happen next?

Some analysts feel that the very measures meant to get us out of the recession will, in fact, spur greater inflation down the road. Recently, Federal Reserve Chairman Ben Bernanke said the economy is improving and unveiled an “exit strategy” from economic stimulus aimed at putting a lid on inflation. No matter how hard policymakers try to keep inflation from happening, however, it is still a fixture of our economy.

Inflation represents a rise in prices—or a reduction in your dollar’s spending power. So how can you protect yourself from declining purchasing power? Here are some strategies you can use to beat inflation.

Investing to Beat Inflation

Certain investments can help you beat inflation. Cash and most bonds are not usually among the investments that are most likely to beat inflation because the inflation rate in the near future will (most likely) out-pace the interest on bonds. You wouldn't be adding to your stockpile so much as just keeping up with inflation. MoneyWeek offers three suggestions for investments that are more likely, in the long run, to help you salvage the value of your hard-earned money:

  1. Stocks. Over time, the stock market rather handily beats inflation. If you are nervous about individual stocks, you can consider index funds, which are tied to the overall performance of an index, rather than relying on stock picking and hope.
  2. Gold and other precious metals. Tangible assets are often cited as hedges against inflation. Gold and other precious metals can provide a way for you to retain solid, “real” wealth that is less likely to be eroded by the inflation.
  3. Index-linked bonds. These bonds are tied to a specific index. Bonds linked to the Consumer Price Index, for example, automatically keep pace with prices. The U.S. Treasury also offers bonds, called Treasury Infaltion-Protected Securities (Stock Quote: TIP), which adjust automatically with inflation so that you receive “real” returns.

Another strategy you can use is to lock in interest yields when they move higher. When inflation is a concern, and interest rates are on the rise, keep an eye on CDs, person-to-person lending and other savings and investment vehicles that offer fixed rates of return. Times of inflation can offer you opportunities to be on the receiving end of those higher prices.

Improve Your Cash Flow

Your personal finance situation can be enhanced in ways that allow you to keep ahead of price increases as well. Re-assessing your financial situation now can provide you with a plan to retain your spending power. Look at your inflows and outflows to determine how improving your cash flow can help you stay ahead of inflation.

Boosting your earning power is one way to beat inflation. Develop skills that qualify you for a pay raise at work. Get a modest education that can improve your earning prospects in the future.

Of course, if you don’t like the idea of working for “the man,” you can also stay ahead of inflation by owning your own business. As inflation sets in, you can raise your pricing and fees to keep pace.

A trend toward frugality is sweeping the nation, and it can also help protect you from the ravages of inflation. Look for lower-priced items, and consider do-it-yourself alternatives. If you practice frugality now, you will get in the habit of avoiding higher prices.

Finally, you can re-do your debt. Inflation means that debt becomes costlier as well, with interest rates rising. If you have variable-rate debt, this means that you will pay more for it over time. Business Pundit points out that if you have fixed-rate debt, you pay less in real terms as inflation progresses. Try to convert as much of your debt as possible to fixed-rate debt, and pay off your variable-rate debt as soon as possible.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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