Inflation is the measure of how much costs of goods and services increase over time. This effect reduces the value of your money, meaning that a given amount buys less in the future than it would today.
Overall, inflation means bad news for your financial life. But fortunately, there are things you can do to mitigate its impact. So, what are they?
In this article, we’ll share four ways to protect your capital from inflation.
- Pay back loans
Increases in inflation mean a higher cost of living. When the basic necessities of life are more expensive, the last thing you want is outstanding debts to be eating into your income. That’s why its important you pay back your loans, using tried-and-tested debt-clearing strategies like the snowball method or avalanche method. Whatever tactic you go for, ensure you stay consistent and meet the minimum monthly payments on all your loans to stop them growing out of control.
- Cut down on spending
There’s no way for you to make the cost of goods and services go down, but you can make it easier to manage high prices. Tightening up your budget is the best way to do this. Write down how much money you have coming in and how much you’re spending. Then, look for opportunities to cut back on your expenses. It could be that you’re losing a significant chunk of cash on things that are nice-to-haves, rather than essentials.
- Make smart investments
Another way to fight against the money-eroding power of inflation is to invest your savings into assets whose average returns are higher than the inflation rate. During times of low inflation, an ISA savings account might be enough to achieve this. But when inflation is high, you’d be better off investing your money into a low-risk index fund ETF using a stock trading platform.
- Switch to a fixed mortgage
The Bank of England typically raises the base interest rate as a way to bring inflation under control. The idea is that demand for goods and services falls when borrowing is more expensive. Yet this has the knock-on effect of making variable-rate mortgages more expensive. If you have a variable-rate mortgage and inflation is on the rise, you could protect yourself from higher interest rates by switching to a fixed mortgage that has a set interest rate for a period of a few years.
Rising prices can have a big impact on the state of your finances. But by using the tips above, you should be able to effectively protect your capital from the worst of inflation.
