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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