October 9, 2008, 6:00 am

How To Beat Inflation

by: The Financial Blogger    Category: Investment, Market and Risk,Personal Finance
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In the red corner, super powered by the power of compounding interest, over weighted by the oil price and the raise of commodities with over 100 years of battles won, ladies and gentlemen, here is THE INFLATION! His opponent, sitting desperately in the blue corner, being defeated by KO’s in his 3 last battles against the subprime crisis, the financials crisis and current recession, weakened by stress at work and at home, ladies and gentlemen, here is THE CONSUMER. Who do you think will win this battle? Make your bet shortly because the fight is about to begin!



I don’t care if the oil barrel is dropping down below $100, I still pay the same high price for gas than at the beginning of the summer. We get filled by so many lame excuses (the last one was Ike!) than we are just a bunch of sheep, resigned to go to the slaughter house. NICE!

One of the purposes that we are waking up every single morning to go to work is to pay for our bills, maintain our lifestyles and hope for a better future. But how can we actually survive when our income is kept as is and the inflation is playing around 3 to 4% depending where you live? Here is a two part post about how to kick the inflation in the nuts and run away with something in your pocket!

Protect your investment

I think it is now obvious that GIC’s won’t protect your investment anymore. We are having a hard time to get 4% on the market. If the investment is held outside your RRSP or 401(K), you have to pay taxes on this interest income. Therefore, you are left with a net of roughly 2% and the inflation is between 3 to 4% right now.

There are many ways to protect your investment from inflation. The first one is to hold your fixed income inside your RRSP and 401(K). You should technically hold your more secure investment within this type of account since they are tax sheltered.

If you still want to invest into fixed income in your non registered account, I suggest you consider Corporate Class Funds which enables to grow your investment without paying taxes right away. In addition to that, interest income, dividend income and capital gains are all considered to be taxed as capital gains with this type of investments. Therefore, you can invest into bond funds or money market and deferring taxes in time.

Another option for Canadians will be the TFSA (Tax Free Saving Account) that will be available starting in 2009. This will allow you to put 5K per person per year into a tax sheltered investment account. Savings on taxes would definitely help prevent the damage caused by inflation.

Another investment type would be companies or other investment vehicle that provides dividend. For example, banks are reputed to give good and steady dividends that cover the inflation over time. The advantage which such high paying dividend stocks or funds is that they increase their dividend over time so you can always follow the inflation. I truly believe it is a good timing to invest into financials as they are taking a beating. Good banks will get out of this mess and still give a good dividend yield.

These are obviously not advices for your personal situation as I don’t know each of you personally. You should seriously sit with your financial advisor and discuss those points before making any decisions. Stay tunes as tomorrow, I’ll write about more tricks to beat inflation.

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Comments

Also, I think it always bears repeating that, if a consumer has any high interest credit card debt, they should pay it off first before investing in anything (though they should maintain a small, liquid emergency fund).

Good advice praveen. Everyone is so tempted by the market right now [which they should be] but it is all for not if you are carrying the debt.

[…] The Financial Blogger explains how to beat inflation. […]

It will take sometime for the markets to overcome what we are going through these days. The Dow Jones lost more than 1,000 points in a week and is at a 10 year low below 10,000 basis points. All of these plans that the federal governments keep trying to initiate are bogus to me. How do you think we got to where we are today?

by: The Financial Blogger | October 11th, 2008 (6:56 am)

Hey Donny,

I truly believe everything started with the Credit Debt Swaps and sup prime mortgage. I actually wrote an article explaining the CDS:
http://www.thefinancialblogger.com/behind-the-financial-crisis-credit-default-swaps/

Let me know what you think 😉

Cheers,

Mike

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Balancing the investment returns against the prevailing inflation may be helpful action to control the diverse effect of the inflation on our pocket. I would also compromise with the usual living style.

Lisa

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[…] The Financial Blogger has some advice on beating inflation. […]

F.B : I dont get your answer re protection from inflation. lived thro 80/81 and interest on deposits spiked. At the moment how is it sense to go to RSP to avoid ?2% taxes. Some of us are too old for RSP. My question is where to put, say 100,000 before inflation hits,as it must. Gold? nails? soy beans, Preferably small volume,non-perishable ,essential ,easily disposable. Any ideas?

by: The Financial Blogger | November 7th, 2008 (6:23 pm)

Robert,
the key here is to try to manage your personal finance so you can get more money in your pocket. You can’t avoid inflation, but if you have more money in your pocket, you will be able to keep up with your life style

100K non registered without the possibility to invest in RRSP? I suggest 5K in the new TFSA (coming jan09) and the rest in corporate class funds (they can be money market fund giving 3% free of inflation). You can always invest through a life insurance policy (Cash Surrender Value grow without tax)

Hope it helps!

FB.

[…] I mentioned before, there are 2 major things where you can save money and increase your investment yield at the same time: Controlling your management fees and decrease your taxes. Since it is a major […]