When money becomes less valuable and costs rise, the money you have saved affords you exponentially less. In the short term, you may not notice the difference. According to the U.S. Bureau of Labor Statistics, $1 in June 2020 has an equivalent purchasing power to $1.18 as of June 2023.
That might not seem like a lot to some people, but in the long run, such inflation is highly destructive to the purchasing power of your money.
We have no way of telling the future with certainty, but we can reasonably discern that if a person is going to retire 30 or 40 years from now, $1 today is not likely to have even near the purchasing power in 2053 or 2063 that it does today. To avoid that potentially serious hardship, it is important to protect your wealth by hedging against inflation.
What Is Hedging against Inflation?
Hedging against inflation, also referred to as inflation hedging, is a process of investing that aims to avoid loss of wealth or purchasing power at a later date.
There are numerous ways to hedge against inflation to better protect your wealth in the long term. Simply keeping your money in a traditional checking account or savings account is not going to protect your wealth. Finding ways to actively build a store of value that exceeds the real costs of inflation is the key to success. Hedging is a bit like insurance in that there are costs upfront and/or along the way, but if you ever need to make a claim on your insurance it is likely to financially save you.
So how can someone hedge against inflation? Here are four ideas.