Key Points
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There are many investments that act as hedges against inflation.
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Taking a strategic approach to wealth building can help you make moves that will benefit you now and into the future.
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High-interest debt grows even heavier as inflation rises.
The older I get, the more value I find in gaining a historical perspective before spiraling. For example, as troubling as I find the current rate of inflation, I’m trying to keep it together — primarily because I know how hideous inflationary periods can be. For example, the worst inflation in American history occurred between 1916 and 1920, when prices on nearly everything more than doubled. In perspective, that makes today’s year-over-year inflation rate of 3.8% feel (slightly) more manageable.
However, it still hurts, especially if you’re between jobs, raising children, on a fixed income, or simply trying to build wealth. And that’s the sticking point for me. How are you supposed to build net worth while fighting sky-high prices?
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These four tips can help.
1. Maximize tax-advantaged accounts
Whether your employer offers a retirement plan like a 401(k) or you work through a broker to open an individual retirement account (IRA), each offers immediate tax benefits while allowing your investments to grow tax-free. The combination of compound growth and tax savings makes tax-advantaged retirement plans a particularly powerful weapon against inflation. And if your employer offers to match a portion of your contribution, that provides you with even greater protection.
2. Seek assets that historically outpace inflation
The secret to beating inflation is to ensure that your money grows faster than prices rise. History indicates that stocks have delivered returns that beat inflation over the long term, making them a great place to start.
The good news? You have all kinds of options when it comes to buying stocks. For example, consider an exchange-traded fund (ETF) that tracks a broad index such as the S&P 500 or the Nasdaq.
Another option is to invest in a real estate investment trust (REIT). Here’s why: Real estate provides a hedge against inflation because, as inflation rises, the price of real estate also tends to rise.
3. Get rid of high-interest debt
If you’re in debt, no one needs to tell you that it’s not great for your monthly budget. However, nearly all credit cards have variable rates, meaning the high interest rate you’re paying becomes even higher. Get aggressive about paying down balances by using strategies like the debt avalanche method to free up cash flow for wealth-building activities.
4. Diversify your income
Anything you can do to create multiple streams of income can help you fight the high cost of living. For example, take on a side hustle like tutoring, watching children before and after school, or renting out spare space around your home to people who need somewhere to store their stuff. For example, if you have an empty garage stall or attic space, rent it to someone else.
The bottom line is that, for most people, building wealth while inflation rages requires a proactive approach that combines three things: spending wisely, investing strategically, and earning more. While this period of inflation may not last forever, your good financial habits will.
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