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3 Effective Ways To Hedge Against Inflation

Last Updated on July 29, 2022

From public transport to purchasing groceries, the cost of living is increasing sharply – not just in Singapore, but around the world.

In fact, Channel NewsAsia’s latest official data revealed that Singapore’s headline inflation for December rose to 4 per cent on a year-on-year basis from November’s 3.8 per cent, reaching a near nine-year high.

Unfortunately, the year-on-year inflation will possibly stay elevated. Nonetheless, there are a number of ways you can hedge against inflation.

What is inflation?

Inflation refers to the increase in prices for products and services and fall in the purchasing power of money in general. In other words, whether you’re buying your favourite Calbee Hot and Spicy chips or the latest Macbook, the prices have gone up.

1. Make your savings work harder

Saving your money in an ordinary bank account? While it may seem like you are “saving”, you cannot be further from the truth. Thanks to inflation, the value of your savings are diminished over time if you were to leave them sitting pretty in your bank account. In other words, if the inflation rate exceeds the interest you are earning in a savings account, then you are losing money.

Instead, consider these alternatives:

a.   Fixed deposit account

Compared to a normal bank savings account, a fixed deposit account offers a higher annual interest rate of between 0.10% to 1.15%. However, the caveat is that you should have a bigger sum of money and have the ability to do without that cash liquidity for the stated period of time.

b.   Higher-interest savings accounts

Several banks including OCBC, DBS, UOB and the like offer bonus interest rates on certain savings accounts. Some banks give out up to 3% interest rate.

For instance, if you open a savings account with the bank, invest or purchase an insurance product, and own a credit card from them, you get to consolidate all your spending with one bank and could possibly even earn higher interests. However, you may have to fulfil certain criteria including your monthly salary credit, minimum spending on your credit card and minimum bank account transactions.

c.    Transfer funds from Ordinary Account to Special Account

To beat inflation, you can transfer funds from your Central Provident Fund (CPF) Ordinary Account (OA) to your Special Account (SA). While your OA only pays an annual interest of 2.5%, the SA offers 4%. The extra 1.5% makes a significant difference since interest compounds over time.

For instance, this is what your savings will look like after 30 years in either the OA or the SA:

AccountSum
Sum after 30 years
Ordinary Account (2.5% interest)$50,000$104,878.38
Special Account (4% interest)$50,000$162,169.88

As illustrated, your CPF funds will increase by an additional S$57,291.50 if it were kept in your SA instead of your OA. You also enjoy an extra 1% interest per annum on the first S$60,000 on your combined OA and SA CPF balances.

However, take note that this is a one-way transfer. This means that you can move funds from your OA to your SA, but not the other way around. If you are thinking of using your OA funds to buy a house in the near future, you may want to think carefully before transferring any money. If your housing needs are already taken care of, transferring your funds from your OA to your SA could ensure a larger nest egg.

d.   Top up your Special Account

You can also top up money into your SA directly. The 4% interest you earn through your SA is around twice the rate you earn putting your money into saving accounts under programmes such as UOB One or DBS Multiplier. Additionally, you are entitled to a tax relief on up to S$8,000 of cash top-ups to your SA every year.

2. Diversify portfolio

a.   Invest and grow wealth

Investing is the best way to protect your money against inflation. Starting on your investment journey early can be beneficial, since your investments will have more time to navigate the volatile financial markets, especially in the age of a pandemic and war.

Furthermore, investing early allows compound interest to work its magic. While the initial amount may seem insignificant when you first start investing, such regular investments can sum up to a huge amount over a 20-year timeframe, putting you ahead of your peers and allowing you greater financial freedom at a later stage in life. The effect of compounding can help you grow your wealth faster. It is also the best way to work towards your retirement goals. Reduce your investment risk by diversifying your portfolios and dividing your investments into asset classes that are not correlated.

Tip: Check out our retirement calculator to help you work towards your retirement in a confident and systematic way!

Learn more: 4 basic rules of investing in your 20s.

b.   Endowment plans

Have a low risk appetite but want to hedge against inflation? Endowment plans might be the way to go.

Endowment plans are traditionally a hybrid product for savings or insurance, generally recommended as a way to save for your retirement, your child’s education or other milestones. However, short-term endowment plans are now offered, maturing in just two to six years instead of taking a decade or longer. In most setups, the plan will earn you an interest of 0.5% – 4% per annum.

These tranches are usually offered from time to time with different conditions, so you may wish to speak to your Financial Advisor.

If you plan to purchase an endowment plan on your own, here’s what you should look out for.

c.     Cryptocurrency

According to JP Morgan, cryptocurrency is viewed as a better hedge against inflation than gold.

The reemergence of inflation concerns has renewed investors’ interest has renewed interest in the usage of cryptocurrency – namely Bitcoin – as an inflation hedge. When it comes to flipping the coin, should you buy Bitcoin or Ethereum? The debate rages on, since it eventually boils down to your risk appetite.

However, since the cryptocurrency market remains volatile, investing in cryptocurrency can be a useful part of your diversification strategy and requires a long-term investment horizon.

3. Insurance to cover yourself financially should mishaps happen

Life is full of unpredictable moments – that’s why it is so important to get started on buying insurance. Insurance plays an important part in every stage of life, as it protects you and your family from life’s unpredictability.

With healthcare being so expensive in Singapore, it would be prudent to invest in insurance policies to safeguard your future. Insurance policies provide you with a sum of money in the event of an unfortunate situation, in exchange for smaller sums paid before it occurs, called premiums.

Unsure of how much you should set aside for your insurance? This calculator helps you to figure out the total insurance coverage you need, and whether you’re sufficiently insured.

Protect your finances with wise decisions

The financial decisions that you make today will have an impact on the rest of your life. When you learn to make good financial choices, you are setting yourself up for a smoother financial road ahead.

While inflation will be a constant challenge, you can still protect your finances and make your money work harder for you.

What are some tips you have to hedge against inflation? Share with us at ask@plannerbee.co!

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