How to Prepare for Inflation – Taxes, Investments and Finances

When considering how to prepare for inflation, it can certainly feel like an uphill battle. Worrying about if your investments and financial decisions will hold up well down the road is a scary proposition. But there are things you can do now to learn how to prepare for inflation, and potentially beat it. But first, what is inflation?

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What is Inflation?

Inflation is described as a general increase in prices and a fall in the purchasing power of a currency. With an increase in inflation, the value of your money can decrease. That means your assets and wealth 10 years prior could potentially be more valuable than in the present. The same goes when considering future inflation.

What Causes Inflation?

There are many ways that inflation can rise in an economy. Knowing which to anticipate will help you determine how to prepare for inflation. These are just a few of the drivers of inflation:

  • Cost-Push Inflation
    • Prices in goods increase due to an increase in production costs, like raw materials and wages.
    • While demand stays steady, the costs of labor and/or materials increase, leading to an increase in what a company/economy will charge for goods and services.
      • Consumers eat the losses here, and the value of the dollar shrinks due to the rise in the cost of goods.
  • Demand-Pull Inflation
    • Demand surges for a product/industry, it creates limits in the market for goods
    • With limited production and exponential growth in demand, this leads to an increase in cost due to scarcity.
    • With long-term shortages in goods, this can spread in an economy, creating widespread inflation.
      • This limits the value of the dollar for consumers.

How to Prepare for Inflation?

Now that we understand what inflation is, and what causes it, we can begin to prepare for it. While inflation can hurt consumers, it can be beneficial to investors and businesses. Knowing this will help you understand how to “beat” inflation.

1. Diversify Your Assets and Investments

The single most important thing you can do in financial decisions is to diversify your portfolio, no matter what your assets are. The same can be said for beating inflation. When you diversify your assets, you’re protecting yourself from the risk of having too much financial stock in a single asset, industry, or material good. As we mentioned earlier, inflation can come from increased demand and increased cost of manufacture. Spreading out your investments means reducing risk, as it’s unlikely all industries will be hit at similar times.

Investments in things like Crypto Currency can be a huge asset for growth during other markets’ periods of inflation. Check out cryptocurrency exchange platforms like Coinbase, which offers thousands of different coins, to help diversify your assets.

2. Project Tax Rates For Future Retirement

Saving for your retirement should always be your long-term goal for financial security. Investing in a 401k is the simplest and best tool for your retirement funds. But with rising costs and future inflation, it’s a good idea to either project future tax rates, or consult with experts on what’s best for your current and future financial situation. The most common 401k accounts are typically either:

  • Roth IRA
  • Traditional IRA

Each of these accounts has different tax benefits, and understanding inflation means knowing if tax rates will likely be better or worse when you retire. Projecting this can help you balance your assets, and minimize your losses in taxation on your retirement funds.

You should also look to invest your time and resources in a company that can help you get the most out of your taxes. A service like H&R Block has a great reputation for helping individuals with their taxes and assets. And with taxes due soon, now is a better time than any to start working out your taxes and finances with them.

3. Consider Timing on Big-Ticket Purchases

Knowing when the right time is to put your money in investments will help you get the best value for your purchase. If you suspect incoming inflation, it is best to make your big purchasing decisions prior to, or following, a drop. Much like the stock market, always work to make your purchases when inflation is low. Inflation is often short-term, so holding out can prove to be your best decision.

4. Always Find Ways to Reduce Your Costs

Whether for your business expenses, or personal expenses, you should always be aiming to limit your expenses so you can prepare for a hike in prices. Things like promos, deals, membership discounts, etc can help cut costs for your daily expenses. When you are able to save on your daily expenditures, you are more suited for periods of inflation.

More Financial Advice 

The threat of inflation has been an ebb and flow throughout our economical history. And learning how to prepare for inflation is the best thing you can do the ride out another inflation event. But there are other things you can do to help take the weight off your shoulders, like learning how to save money for when you really need it!

The bottom line is that no one will look after your finances like you will, so learn how to make the most of our current economical forecast.

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