By Liz Weston
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Inflation is scary. Groceries, gas, airfare, car purchases, utilities: In so many areas, your buying power is shrinking as prices continue to rise.
Fear can make you want to do something — anything! — to fight back. Thankfully, many of the best moves to counteract inflation align beautifully with time-tested money management practices. Here are three areas where smart strategies become even smarter when prices are rising .
Invest with the long term in mind
Advice about “inflation proofing” your investments often mentions gold, commodities and real estate. If you already have a well-diversified portfolio, though, beware of short-term strategies that could backfire, says Michelle Gessner, a certified financial planner in Houston.
“Your best bet is stocks,” Gessner says. “Investing in equities is one of the best hedges against inflation that there is.”
Gold hasn’t been a reliable inflation hedge since the 1970s, Gessner notes. Commodities — basic goods such as agricultural products, fuel and metals — can be profitable when inflation spikes, but returns over the long run have been disappointing. For the 20-year period ending April 29, for example, the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.97% stock index more than tripled while the Bloomberg Commodity Index was up about 30%.
Real estate has a better track record, both during inflationary periods and for the long haul. But owning property directly can be a hassle, which is why many financial planners recommend mutual funds, exchange-traded funds or real estate investment trusts that invest in office buildings, apartments, hotels, shopping centers and other commercial property.
But even there, people shouldn’t go overboard, Gessner says. She recommends that her clients invest 3% to 4% of their portfolios in real estate .
“Everything in moderation,” Gessner says. “More is not necessarily better.”
Pay down debt the smart way
Inflation can be good for people with fixed-rate debt such as mortgages, car loans or federal student loans. As inflation erodes a dollar’s buying power, borrowers are able to pay back debt with cheaper money than what they borrowed.
Even without inflation, though, financial planners say most people have better uses for their money than prepaying debt with low, fixed rates. Only after you’ve maxed out your retirement savings, built up an emergency fund and paid off all other, higher-rate debt should you consider making extra payments on a mortgage, for example.
“Having a mortgage at 3% is not such a bad thing if you can take that money and do something better with it,” Gessner says.
Consider targeting any credit card or other variable rate debt, since that’s likely getting more expensive as th e Federal Reserve raises interest rates to combat inflation. If you can’t pay this debt off quickly, look into fixing the rate. You may be able to use a personal loan to pay off credit cards, for example, if you have good credit. If you’re struggling to pay your debt, a nonprofit credit counselor can help review your budget and discuss options. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org.