Hedging Against Inflation

2011-11-06T13:35:00.000-08:00

As the depression continues, folks should begin preparing for the inflation that will, inevitably, sweep over the financial landscape. Inflation erodes the purchasing power of your savings and income. Hedging will protect your standard of living from inflation. Hedging consists of making an investment that will offset the drop in the purchasing power of your savings and income.

Specifically, if your current income is greater than your current expenses, you need to prepare for a period of increasing expenses and stagnant income. Young people can ignore this advice, because they can compensate for the increasing expenses, by increasing their incomes. They can do this by making adjustments to their educations, jobs, or business plans. People, who are not currently ahead of the game, that is their income is equal to or less than expenses, must lower expenses and or increase income. How to lower expenses is summarized in one word: move. The best way to increase income is to do what the young folks do.

Hedging against inflation is, particularly, important to retired and old people. This group will have problems increasing their incomes during an inflationary period. COLAs and interest income will not provide the protection required because both will lag behind inflation. By the time Social Security is increased by a 5% COLA, expenses will have risen 10% for the previous year. The 5% COLA would not have maintained their standard of living in the previous year and for the year in which they received the 5%, the inflation rate could ratchet to 15%.

What to do?

Lock in as much of your housing expenses as possible. The biggest cost is the monthly rent or mortgage. If you are receiving an annuity, then obtain the longest term fixed interest mortgage and put as little, as possible, down. This will very safely hedge your future income stream from the diminishing buying power that results from inflation. In 10 or 20 years, you will be asked: "how can you afford this house on your retirement income?" You will respond: "I bought this house with a mortgage long ago, when the dollar still had some value."

If you have an ample income or sufficient cash, simply, buy the house or buy multiple homes. Paying rent will be disastrous in the long-term, but being a landlord will be among the best ways to stay even or ahead of inflation.

Other costs can be hedged by buying dividend paying stocks of companies, whose services or goods you will require for the long-term. For example if your electric bill is currently, $100 a month, buy or accumulate by dollar cost averaging that amount of electric utility stock whose dividend will equal $100 a month. This concept can also be applied to your local taxes and federal taxes. Buy sufficient bonds to cover the tax. Of course for the average person, it will never be, theoretically, possible to cover all expenses, but this strategy, will offset the drop in standard of living for a very long time.

However, lets go back to housing. The single best thing to do is lock in housing expenses by buying a home, preferably, with a fixed rate long term mortgage. The next best things to do to hedge your current standard of living is to buy another home and, if you can afford it, yet another.

Time Well Spent

2011-11-06T13:16:00.000-08:00

"Time well spent is money earned."

AntiBrokers

Hedging Against Inflation

Time Well Spent