Economics was one of my favorite classes in college because I learned how the world works. I learned a lot about money, banking, manufacturing, supply, demand and everything else that explains the realities we experience around us.
One such reality is inflation, which means the worth of your dollar today will not be the same as its worth in the future. Your dollar will buy a lot less.
The world could be a much simpler place, specifically from a personal finance perspective if inflation didn’t exist. The reality however is that inflation is omnipresent and will continue to be.
The following guest post by Keith Sullivan discusses some of the ways one can cope with inflation to maintain purchasing power. Take it away Kevin…
Inflation is the great equalizer in the economy today.It’s the leveler that brings investors down by curtailing their profits. It has to happen, of course. It’s basic supply and demand and it happens with any economy.
The biggest problem with inflation is the Fed is doing nothing to prevent it. In fact, they’re making it worse. Think about how they’re buying up $85 billion in debt every month. It’s gone from massaging the economy to a never ending cycle of printing presses and more dollar notes.
Naturally, as more money enters the system each dollar is worth slightly less.
The investor has to be careful of inflation. In an economy with five percent inflation, you need to have returns of five percent or more to avoid losing value. Anything less would be a loss and a disastrous year for the investor.
During such a time, everyone could do with some sound financial advice on how to better cope with inflation. True, you can’t remain completely unaffected, but mentioned below are some suggestions that if you put into practice, might just cushion the fall.
The depreciation of the value of the dollar is a currency issue. It doesn’t change the price of a house.
Real estate is a great idea for people who want to beat inflation. Retired couples thinking about downsizing should put off this idea for now. Houses keep up with the higher cost of living reasonably well.
Over the last century, inflation probably has about a one percent advantage over real estate prices.
Now is the time to put your money into real estate. Buyers are enjoying incredibly low prices, especially in financially broken areas like Detroit and California.
Although the housing crisis is still going on, this is likely to recover fairly soon. We’ll all see the inflation beating rates of houses coming back soon.
Stocks and shares are more than capable of beating current inflation rates. You do have to be careful of overvalued companies, though.
At the moment, we’re in a marketplace that’s filled with optimism. For the average investor, this is dangerous. It means companies like Tesla are seeing their stock prices quintuple, despite the fact they continue to post losses.
You can easily hit returns of five percent if you invest wisely, though. It doesn’t take much as long as you choose a high-quality company with substance behind its stock prices.
Social security is pitiful. It’s essentially a government-backed Ponzi scheme these days. You won’t get a lot of money from social security, or at least nothing more than what you can get from a simple investment of your funds in the markets.
What you need to understand is that social security isn’t always protected against inflation. Your monthly check is protected against inflation. Put the money towards a far superior investment.
The problem with social security at the moment is its value depends on when you draw it. There are tons of strategies on how you should time social security payouts.
It might seem crazy to advocate more debt, but having more debt can help you to beat inflation now. Of course, if you have the option, you should have your mortgage paid off.
Younger people will benefit from owing money. Unexpected inflation can potentially give you a major windfall.
Why does it work this way?
Any payments you make will be done with dollars that have a lower value. You’re essentially paying less than what you ever intended.
Let’s use an example to make this clearer. You have a $500,000 fixed-rate mortgage. You have another $500,000 in a tax-sheltered retirement account. This so happens to be a Ginnie Mae fund.
If interest rates go up, your fund will lose value. Yet it will also make sure your home’s value goes up. At the same time, your mortgage debt is frozen. This instantly leaves you with more home equity.
This doesn’t mean you should go and take the biggest loan you can. Treat debt with the seriousness and respect it deserves. If you don’t have to be in debt, don’t be in debt. Younger people who have to put up with it, though, will benefit from slowing down the rate at which they normally build up equity.
Historically, precious metals like gold have been the safety zone for investors looking to combat inflation. This isn’t the case today. Gold prices haven’t shot up with the weakened currency.
Most investors, at the moment, wait for gold prices to suddenly rise. It might come eventually, but analysts say there’s a good chance prices won’t go up.
This leaves you at risk of seeing your investment fall under the rate of inflation. This is definitely personal finance with a twist, but the fact is the traditional investments are no longer as relevant as they once were.
Does this mean you should avoid precious metals completely?
Absolutely not. They’re a commodity that will always have value. It’s dangerous to rely entirely on paper currency. Always have some commodities within your portfolio, even if they don’t beat inflation.
If necessary, accept that your investment won’t beat inflation this year. Inflation has to come down sooner or later. Investors often panic about beating this arbitrary number.
And when panic sets in, that’s when people start to take risks they otherwise wouldn’t take. Minus one percent on your returns isn’t going to cripple you. What can cripple you is frivolous investing.
The overall point is to keep inflation rates in mind, but don’t let it drive what investments you eventually decide to make.