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7 Tips to Hedge Against Inflation in Canada 2024

hedge against inflation in canada

Inflation in Canada has surged to a 30-year high, reaching a breathtaking 5.7% in February 2022. This substantial inflationary hike has notably raised the prices of daily necessities like groceries and gasoline. As a result, Canadians are feeling a strong financial pinch, which is having conspicuous effects on their wallets and savings.

Many people may be tempted to hide their money under their mattress or in a high-interest savings account to try and save some money. However, with an inflation rate of 5.7%, even a high-interest savings account with a 2% rate would result in a loss of 3.7% of their money. This means that even if people are saving money, they are still losing money in today’s environment.

To help Canadians keep afloat amidst inflation, here are seven tips to hedge against inflation in Canada.

1. Make Extra Money

One of the most effective ways to hedge against inflation is to make extra money. With the advent of the internet, there are now many side hustles that one can engage in to earn more income. These include dog walking services with Rover, delivering meals through Uber Eats or DoorDash, renting out a room or suite with Airbnb, hosting a homestay student, creating items or crafts and selling them on Etsy, and even selling items that are no longer needed on Facebook Marketplace or Craigslist.

Although the income generated from these activities may seem insignificant at first, it can add up over time. Making extra money is an excellent way to stay ahead of inflation and increase one’s purchasing power.

2. Invest in Equities

Investing in equities is one of the best ways to hedge against inflation in Canada. By purchasing income-producing assets and investing in companies where profits grow faster than inflation, investors can benefit from the company’s continued growth and profitability. While it may be scary to invest in the stock market during times of uncertainty, not owning equities during high inflationary times is actually considered riskier.

According to Genevieve Roch-Decter of Grit Capital, since 1900, the US dollar has lost 98% of its purchasing power, while the S&P500 has returned an astounding inflation-adjusted 315,853%. The S&P500 comprises 500 of America’s largest companies, and these companies can pass on the higher inflation costs to their customers. Therefore, investors can benefit from the company’s continued growth and profitability.

Investing in equities is not risky per se, especially if investing in an index fund like the S&P500. If investing in individual companies, it is important to consider companies that can easily pass on the cost of inflation to their customers. Companies that require little capital to operate tend to do well in a high inflationary environment.

Wealthica is a useful tool for keeping track of equity investments. By investing in equities, investors can hedge against inflation and potentially see significant returns on their investments.

3. Invest in Real Estate

Investing in real estate can be a smart way to hedge against inflation. As the inflation rate increases, property values usually follow suit. If you own real estate in a desirable location with a robust economy, you can pass on rent increases to your tenants. However, this may not be possible in locations where rent increases are capped. For example, in Vancouver BC, the maximum allowable rent increase for 2022 is 1.5% due to a recent rent freeze caused by COVID.

Investing in Real Estate Investment Trusts (REITs) is a less troublesome option than dealing with tenants. REITs are companies that own and operate real estate that produces income. They provide investors with exposure to real estate without requiring the investors to manage the properties themselves.

Real estate crowdfunding is another option for smaller investment amounts, allowing individuals who may not have large capital to invest in real estate. Real estate crowdfunding platforms enable investors to pool their resources to invest in real estate projects. However, it is important to conduct thorough research and due diligence before investing in any real estate investment.

4. Use Debt Wisely

Borrowing money can be a useful tool to build wealth, especially in a low-interest-rate environment. However, it is essential to use debt wisely and calculate how much leverage can be safely taken on before investing.

Investors can use leverage to purchase assets at discounted prices, which can help beat inflation. Additionally, interest paid on borrowed money can be tax-deductible if the money is used to generate income and invest.

It is important to note that not all debt is bad, and wealthy individuals often use debt to build their wealth. However, investors should be cautious when using leverage and avoid taking on too much debt.

As Warren Buffett once said, “You only find out who is swimming naked when the tide goes out.” Therefore, investors should carefully consider their options and risks before using debt to invest.

5. Live Simply

Individuals and families who live simply will feel the least impact of inflation. By keeping the cost of living low and having a high savings rate before the period of higher inflation, there is more flexibility to deal with the increased cost of goods.

Similar to businesses that require little capital to invest in, households that require little capital to maintain their expenses will fare better during high inflationary times. This means that personal finances will be less affected by inflation if household expenses require little money.

Living simply can be achieved through various means, such as reducing unnecessary expenses, buying used items, and practicing energy efficiency. Additionally, creating a budget and sticking to it can help individuals and families maintain a low cost of living. By living simply, individuals and families can better prepare for and weather the impact of inflation.

6. Meal Plan with Sales in Mind

Meal planning based on weekly flyers and sales can help save money and encourage creativity in meal planning. With the rising costs of certain foods, such as bacon, families are adjusting their meal plans to reflect the higher prices. By eating less bacon and red meat, families can also improve their health.

To hedge against inflation, it is recommended to buy groceries on sale and plan meals accordingly. This can include incorporating locally available and seasonal vegetables and fruits into meal plans. Menu planning, budget-conscious shopping, and preparing ingredients and dishes in advance can also help save money and reduce waste.

When planning meals with sales in mind, it is important to be flexible and willing to make substitutions based on what is available and on sale. This approach can help families save money and encourage them to try new recipes and ingredients.

7. Maximize Loyalty and Rewards Programs

One way to reduce household expenditures is by taking advantage of loyalty and rewards programs. Canadians can benefit from programs like the PC Optimum points program, which offers savings on groceries.

By using the PC Financial World Elite Mastercard when shopping at Loblaw’s stores, customers can earn PC Optimum points quickly. With a few hundred dollars of points in their account, customers can save $50 per month on groceries, which adds up to over $600 per year in savings.

Additionally, Ipsos iSay offers Canadians the opportunity to earn rewards by participating in surveys. By joining and participating in surveys, customers can earn exciting and exclusive offers.

Maximizing loyalty and rewards programs can be an effective way to hedge against inflation in Canada and reduce household expenses. By taking advantage of these programs, Canadians can save money and make a difference in their budget.

Frequently Asked Questions

What are some effective ways to protect your savings from the impact of inflation in Canada?

One of the most effective ways to protect savings from the impact of inflation in Canada is to invest in assets that have a higher return than the inflation rate. Some options include stocks, real estate, and commodities. Another way is to consider investing in inflation-protected securities such as Treasury Inflation-Protected Securities (TIPS).

What are some reliable investment options that can help to hedge against inflation in Canada?

Investing in equities, real estate, and commodities can help to hedge against inflation in Canada. Equities are stocks in companies that have a history of increasing profits faster than inflation. Real estate is an asset that can increase in value as inflation rises. Commodities such as gold and oil can also be a good hedge against inflation.

What are some practical steps that Canadians can take to prepare for potential inflationary pressures?

Canadians can take practical steps to prepare for potential inflationary pressures by creating a budget and sticking to it. They can also consider investing in assets that have a higher return than the inflation rate. Additionally, they can look for ways to reduce their expenses and save more money.

How can Canadians adjust their budget and spending habits to cope with rising inflation?

Canadians can adjust their budget and spending habits to cope with rising inflation by reducing their expenses. They can also look for ways to increase their income, such as taking on a side job or selling unused items. Additionally, they can consider investing in assets that have a higher return than the inflation rate.

What are some historical examples of successful inflation-fighting policies in Canada?

Historical examples of successful inflation-fighting policies in Canada include the Bank of Canada’s inflation targeting policy, which aims to keep inflation within a certain range. Additionally, the government has implemented policies such as wage and price controls, which can help to reduce inflationary pressures.

What are some potential risks and drawbacks associated with using inflation hedges in Canada?

One potential risk of using inflation hedges in Canada is that they may not provide the expected return. Additionally, some hedges such as commodities can be volatile and subject to price fluctuations. Another risk is that inflation may not rise as expected, which could result in lower returns on investments.

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