7 Wealth Generation Strategies for an Inflationary Environment
Inflation is a global issue at the moment, and every country is dealing with the fallout from financial pressure with different levels of success. Individuals concerned with wealth generation are...
Inflation is a global issue at the moment, and every country is dealing with the fallout from financial pressure with different levels of success. Individuals concerned with wealth generation are also scrambling to react to the circumstances.
One way to stay a step ahead of inflation is by effectively building wealth. This can ameliorate monetary shortcomings in the short term. It can also position an individual’s investment portfolio for accelerated growth when inflationary pressures ease in the future.
Here are a few tips to help create a wealth-generation strategy in an inflationary environment.
1. Start with some perspective.
It’s easy to feel blinded by emotions when inflation is in the conversation. This can lead to skewed perspectives and irrational decisions.
Wealth Woman warns against giving (or receiving) financial advice in a vacuum. The strategic financial planning firm adds that simply doing what your neighbors or friends are doing is risky.
In spite of the emphasis on independence in America, freedom doesn’t always translate to wealth. In fact, for the majority of Americans, real wealth is a pipe dream. That means they’re working with limited resources. When that’s the case, crowdsourcing financial information and coming up with generic or formulaic advice is a bad idea.
Instead, it’s important to start by taking a big step back. Consider your entire situation. What are your existing assets? What is your income? Do you have passive income yet or is it all still effort-dependent? Will you need to redirect existing investment funding to cover basic living costs as inflation rises?
When you have a solid perspective of your situation — and only then — it’s time to start creating a personalized and situation-specific wealth-generation strategy.
2. Address your budget.
It’s difficult to invest wisely when your day-to-day activities don’t line up with your (hopefully) savvy investment moves. That’s why, before looking into major investment opportunities, it’s a good idea to start by reviewing your own budgetary activity.
You don’t need to create a penny-pinching or air-tight budget to be a good investor. In fact, there are many different kinds of budgets that can suit different needs. The important thing is that you approach your basic personal finances with a thoughtful and industrious mindset. If you can do that, it can set the tone for calculated investing, too.
When it comes to the inflation part of the equation, there are certain things you can do to adjust your budget with rising costs and a weakening dollar in mind. AllCom Credit Union suggests starting by tracking your spending. This will give you a good idea of where your money is going.
From there, assess needs versus wants. That way you’ll know what items can go if money gets tight. In addition, the financial company recommends basic personal finance activities, such as buying in bulk and purchasing well-made or reusable goods.
Putting the effort into your budget as you prepare to build wealth during inflationary periods has a two-fold effect. It sets the tone for how to handle finances in a challenging fiscal environment. It also ensures that you won’t undermine the part of your income that can go toward generating wealth as expenses rise.
3. Learn to set serious financial goals.
It’s fun to daydream. It’s also great to think of possibilities and best-case scenarios for your financial future. If you want to create an effective wealth generation strategy when inflation is on the table, though, you need to consider how to set realistic goals — especially those that can remain viable in a hostile financial environment.
A good way to filter each financial goal is by putting it through the SMART acronym filter. This means checking to see if each goal is:
- Relevant; and
By setting SMART financial goals, you can rest in the fact that you’ve rooted your current wealth generation strategy in reality and that inflationary headwinds won’t be able to throw off your investing activity.
4. Protect what you already have.
Alright, it’s time to get into the nitty gritty elements of wealth generation when inflation is a factor. Step one is considering the investments that you already have on the table.
If you have some skin in the game, what steps can you take to minimize the impact that rising prices and a disrupted investing environment could have on your current assets?
Members of the Forbes Finance Council suggest a few different ways to protect existing wealth from inflation, including:
- shifting your investment allocation depending on your needs, such as moving more funds to dividend-paying stocks;
- studying what drives the market value and investment opportunity with each asset that you consider;
- diversifying investments to mitigate risk; and
- identifying entities that can rise with inflation, such as real estate, mortgage-backed securities and treasury inflation-protected securities.
As a final note here, the inverse of protecting existing assets is to also focus on certain debts.
For instance, variable rate debt can become an issue if benchmark interest rates are rising to address inflation. When that’s the case, paying down floating rate debt can be an excellent way to preserve wealth and hedge against inflationary pressure.
5. Don’t be drastic — but take risks.
We’ve already touched on the idea of avoiding emotional investment decisions earlier, but it’s worth reiterating.
It’s important to carefully think through every investment decision that you make. Inflation can be scary, and it’s easy for something like a sudden market shift or a rate hike announcement to spook investors.
At times, a rational response to movement in the market is warranted. But you should never act first and think later.
Instead, always filter your decisions through the question of whether you’re acting drastically or rationally. How is each decision helping you reach those SMART goals that you’ve set? Even if your wealth takes a hit at times, staying the course when you have a solid wealth generation plan in place is far better than risking catastrophe through knee-jerk reactions.
6. Think about the right kind of investments.
The kind of investments that you choose can change during inflationary periods. For instance, CNBC recommends focusing on long-term investments that have a good chance of paying off regardless of the effects of short-term inflation.
One of the best ways to do this is to look past vapid dollar valuations in volatile markets. When inflation discomforts investors, stocks that were previously valued very high can often be directly impacted.
When the market undervalues a quality company, it can offer an excellent long-term investment opportunity that can beat any negative effects of inflation over time. Just remember to always study the quality of a company, not its stock, before you choose to buy.
Another, more subtle wealth generation option that can deliver in spades is a direct investment in your individual career and earning potential.
The news outlet adds that periods of inflation can be a good time to invest in personal skills, make career shifts and otherwise invest in a person’s professional future. This kind of forward-thinking activity can set you up in an ideal position when the inflationary pressure lifts and markets pick up speed again.
7. Stay flexible at all times.
It’s difficult to talk about things like staying the course and investing long-term and then in the same conversation discuss staying flexible. And yet, the two concepts must co-exist if you want to generate wealth in an inflationary environment.
The important thing is to avoid misconstruing flexibility with financial activity. Remaining flexible as you generate wealth doesn’t mean you should be shifting money between accounts every day or buying and selling investments every few weeks.
Instead, look for small ways to tweak current investment activity in response to ongoing market conditions. For instance, there’s no investment more long-term than saving for retirement. And yet, there are many ways that you can fight inflation as you save for retirement, such as:
- avoiding holding cash for extended periods of time;
- delaying social security benefits; and
- diversifying investments by shifting to inflation-resistant options, like real estate.
One of the key items to surviving rising inflation as you invest is to assess…and then reassess — often. Money.com points out that financial advisors will usually recommend staying the course in a volatile market, and that’s generally good advice.
However, there are times when change is the right choice, like if you’re still settling on a solid investment strategy.
If you’re still forming a wealth generation strategy, you may need to make changes to how you’re investing. But you can only figure that out if you’re willing to assess your situation on a regular basis.
Building Wealth, Regardless of Your Circumstances
Overcoming unexpected challenges, like those posed by runaway inflation, isn’t anything new. It’s an issue that investors have faced in the past, and they’ll continue to do so at times in the future.
The important thing is that investors come up with sound, personalized wealth generation strategies. When done right, this can maximize your chances of not just surviving but thriving in an inflationary environment.
From gaining perspective and addressing personal budgets to protecting existing assets, diversifying and staying flexible, make sure you have a dependable strategy in place. This can help to guide your investment decisions as the country — and the world — continues to grapple with inflation and all of the financial hurdles that it presents.
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