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This is a follow-up article from Why you should care about Inflation.

Over time, inflation will erode both your standard of living and your savings. I am a firm believer that life should improve constantly. Once I identified inflation as a threat to that, I started learning and trying out ways to beat it.

This post summarizes 8 ways that I’ve used to counter inflation.

1. Reduce expenses

Prices are going up and you’re probably not making more money. The right thing to do is to reduce your expenses to a level that you have at least 10% surplus.

Reducing expenses doesn’t always mean lowering your standard of living. We really do live in an age of excess and if you give proper consideration to your consumption patterns, you’d be happy to find that you can be just as well off spending less.

2. Get out of debt

Pay off all your credit card bills, personal loans and bank credit lines first. For big ticket debts like your car loan and home mortgage - take a cold hard look if this is taking too big a chunk out of your paycheck. If you cannot save due to these, I’d recommend you downgrade to a cheaper alternative.

Debt is a trap - in that if you do lose your source/s of income, it will come back to bite you with high interest rates and enslave you to long periods of repayment. Get out of debt if you don’t want to work for the banks for free.

3. Build new sources of income

No one can give you a guarantee on your income. Even if you work for a Fortune 500 company, you can be retrenched. The buck stops with you. You have to build new sources of income.

I am such a believer in this that I would encourage my employees to think do this.

New income streams can come from freelancing, income stocks, renting an extra room, making and selling pastries and even blogging. Don’t force yourself to do something you don’t like, do something that you are passionate in and make some extra dough with it.

4. Save, save, save

Start saving once you are cash-flow positive (income > expenses). Be regimental about saving because we are weak to the onslaught on commercial advertising. I would even open another savings account and transfer my savings there the moment my paycheck comes in.

First, build up a savings of 3-6 months of your basic must-have expenses. This is your own insurance against any emergencies. If possible, save in a strong currency in a facility that offers minimal exchange costs and yields some interest.

Evangelize the virtues of saving to close family and friends. I’m being a bit selfish here but if your close ones don’t save, they might turn to you in their hour of need. I’m not saying don’t help them, but prevention is always better than cure.

5. Invest for dividend income

Once you’ve build up your emergency savings, you’re in a position to invest. Note that I said ‘invest’, not ‘trade’. When you invest, you buy a stock and keep it around for 3-5 years.

Dividend stocks are stocks of companies that have demonstrated a history of high dividend payouts. These companies should not be in an industry that is at risk now (read: banks).

For now, you should be looking at energy, precious metals, agriculture and commodities. Talk to your trusted professional financial adviser about this. If you don’t have, get one.

One caveat: don’t take everything that your financial adviser tells you, do your own research, learn to manage your own money. There’s this saying in Chinese “你不理財，財不理你”. It’s kind of phrasal palindrome that reads ‘ni bu li cai, cai bu li ni’ which means if you don’t manage your wealth, wealth will not come to you.One tip: look out for energy income trusts that pays out a hefty 1%+ dividend every month (yes, month, not year).

6. Hedge in Gold

To ‘hedge’ means to have something that protects you against some potential financial loss. Here, I’m talking about the financial loss of the value of your currency, when inflation strikes.

Gold has always been the first hedge against currency. That is to say when currencies lose their value, the price of gold goes up.The allocation of gold in your portfolio should be according to how bad you believe this financial (subprime, CDO, SIV, ad nauseam) debacle will play out. Allocate more if you think it’s going to be worse.

The following points are what I’d call “maybes”. They greatly depend on the local market conditions.

7. Buying a house

It’s always reassuring to have a roof over your heads. There’s a school of thought that argues that since inflation is abound, your home mortgage will become ‘cheaper’ in the future. I don’t buy that because there’s more parameters at play here, such as interest rates.

In fact, my believe in home ownership is to do it with a minimal mortgage, i.e. pay as much as you can upfront. This way, you are protected from the banks calling on your mortgage should property prices tank.

Disclaimer: I don’t own property but is waiting on the sidelines for prices to correct in my country.

8. Trade in the stock market

Once again, do this if and only if you know what you’re doing and only with money you can afford to lose.I will strongly advise against using margins (a loan from the securities house), trading in derivatives such as options or warrants, and forex and futures trading.

Disclaimer: I am not financially trained or certified to give anybody any financial advice. The tips above are derived from my own experience. As such, I cannot be responsible for any losses that you might get as a result of this.

Do you have your own ways of beating inflation? Please share them here.