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Is Inflation Eroding Your Money? Hedge It.

November 10, 2024
Economy
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The harsh reality of inflation turns everyday necessities into luxuries. This sneaky economic challenge gradually erodes your purchasing power, making it difficult to maintain a healthy bank balance.  If left unchecked, inflation can affect your ability to afford the goods and services that you want and need.

How Does Inflation Affect Your Savings?

Inflation can erode your savings over time, especially if you’re simply keeping your money in a low-interest savings account. As prices rise, the value of your savings decreases. For instance, if you save N100 today and inflation is 37%, the same N100 will only buy you N73 worth of goods and services. However, all hope is not lost.

There are strategies you can use to lock in the value of your money. This is known as hedging.

Hedging Against Inflation

Hedging is a strategy that merchant banks such as Coronation Merchant Bank can apply to protect you from financial losses due to adverse price movements. In the context of inflation, hedging involves investing in assets that are likely to appreciate when prices rise, for instance, investing in assets like treasury bills and stocks. Let’s deep dive into popular hedging strategies:

  • Investing in Stocks: Historically, stocks have outperformed inflation over the long term. By investing in companies that have high yield profits, you can potentially generate returns that exceed the rate of inflation. However, it’s best practice to consult a reliable financial advisor to make the best investment choices. Our experts in Coronation Securities can assist.
  • Consider a Balanced Portfolio: A diversified portfolio that includes a mix of stocks, bonds, real estate, and commodities can help you manage inflation risk while potentially generating returns.

For people who frequently deal with foreign exchange, there are also hedging strategies to mitigate the risks associated with fluctuating exchange rates. These include:

  1. Forward Contracts: These are agreements to buy or sell currency at a set rate on a future date. Think of a forward contract like a handshake deal with a currency exchange. You agree on a specific exchange rate today (let’s say ₦1000 to €1) for a future date (3 months from now). This way, even if the Euro gets stronger in future, in the meantime, you will only pay ₦1000 for each €1 you need.

Forward contracts let businesses or individuals lock in an exchange rate for future transactions. This provides certainty in pricing and budgeting, helping to protect against adverse currency movements that might hurt profits.

  • Futures Contracts:  Futures contracts are similar to forward contracts; however, they are created with standard terms and are traded on an exchange like FMDQ. This adds a layer of regulation and they are easier to find and manage.
  • Ready to Hedge?

Inflation can be a significant financial challenge. By understanding how it works and implementing effective hedging strategies, you can protect your wealth and ensure that your money doesn’t lose its purchasing power over time. To get started, consider consulting with a financial advisor to determine the best hedging strategies for your individual circumstances.

Contact a trusted financial advisor at Coronation Merchant Bank, today.

Contact Details:

Email:crc@coronationmb.com

Phone: +234 (0)1-2797640-43

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