With inflation soaring at a rate not seen since the 70s, it's time to fight back.
The continued rise in prices throughout the global economy has left the average consumer reeling and the average investor uneasy. There are a few tools for investors to combat inflation, so to the extent you can take advantage of them, it's probably a good idea to do so.
1. Look into I-bonds
Inflation-adjusted savings bonds, or “I-bonds,” have been largely irrelevant over the past decade, but are a useful tool in combating inflation. This is because I-bonds pay a rate of interest with two components: A fixed interest rate and an adjustable inflation rate. For the entirety of the 2010s, both interest rates and inflation rates had been abnormally low, so there wasn't much reason for an ordinary investor to buy I-bonds.
Since inflation has now reached levels not seen in 40 years — with the last reading at 8.6% — I-bonds can now find a role in most portfolios. I-bonds currently pay 9.62%, though that rate is subject to change at least once a year. You'll also lose the last three months of interest if you redeem the bond before five years, and you're only able to buy $10,000 worth annually. Still, guaranteed interest above the current rate of inflation is something worth considering in this economic environment.
2. Don't rush to pay your fixed-rate mortgage
One of the few winning cohorts in times of inflation is that of the fixed-rate mortgage holder. Most people who own real estate — especially those who purchased it in the last decade — have a valuable arrangement with a low, fixed-rate mortgage; that is, they borrowed money at a much lower rate than is available today. As such, they're paying back “yesterday's dollars,” and don't have to face rising monthly payments in the same way that renters do.
Fixed-rate mortgage originators are the ones who feel the pain during times of rising prices, since they're not able to raise interest rates on those who've already locked in fixed-rate loans. You stand to do much better by continuing to invest in the stock market and other productive assets before paying down a low, fixed-rate mortgage early.
3. Continue investing for retirement
Stocks — in general — have historically performed well during times of inflation, so now is most likely not the time to stop investing. Even though we've already touched bear market territory this year, this can be seen as more of an opportunity rather than a calamity for the long-term investor. Cutting off your retirement contributions for any period of time is likely to reduce your net worth many decades from now.
Furthermore, while large cash piles can provide psychological comfort in down markets, runaway inflation can quickly erode your long-run purchasing power if you're only earning 1% on your savings. Once you've established a solid emergency fund, you should consider maximizing contributions to your applicable retirement and education savings accounts to fight back against rapidly rising prices.
Use the available tools and fight back
For almost any economic environment, there is a way to combat the apparent headwinds. Inflation is no doubt a major challenge for nearly all investors. So it is even more imperative to be clear on the levers we have at our disposal to at least keep pace in the long run.
Looking at I-bonds, making the most of fixed-rate mortgages, and continuing to invest in stocks are things you can do to make inflation feel less intense over time. Unfortunately, inflation's effects will be felt in the short run, but keeping an eye on the years and decades ahead can provide perspective in what is otherwise an unusually turbulent time.
Originally published on Fool.com
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