Three Ways to Beat Inflation

by Christopher Levarek

“Inflation is taxation without legislation”

- Milton Friedman

This last weekend, I loaded up my large SUV with toys, food and family. We were heading two hours north, out of Phoenix up to Sedona, AZ. In fact, we were going to check up on some vacation rentals we had purchased with partners earlier in the year.

As I filled up the Toyota Forerunner at $5 a gallon, I couldn’t help notice the end amount was over a $100 bucks!

I couldn’t help think, how did we get here? How on earth are middle income earners supposed to drive to work? Feed their family?

It seems like there really isn’t much a person can do. Right?

That is how this article came about, because you see, there is alot a person can do to beat inflation. Today I’m going to cover how a person typically loses to inflation and inversely three ways to beat inflation. Let’s jump in.

How do people lose to inflation?

This seems obvious enough I think. When our economy has inflation, we have high prices as demonstrated in the story above. If a person does not increase their income, and they pay higher prices, ultimately they are losing to inflation. Their expenses went up, but their income did not.

Principal number one, people with fixed income lose to inflation.

What is the second way people lose to inflation? Saving dollars. That’s right, keeping your money in your savings account means you are losing to inflation.

Here’s why:

Essentially, inflation means rising prices and ultimately more dollars are required to purchase goods and services. When worded differently, the purchasing power of the dollar is less. Makes sense right? But wait there’s more.

There is always some form of inflation. In most cases the Fed attempts to keep it at 2-3% historically. When they print more dollars, inflation rises as more dollars are added to the money supply. More dollars means higher prices or increased inflation, and lower purchasing power of the dollar.

Essentially one dollar in a person’s savings account is worth less with each passing day. People with capital in savings accounts lose to inflation as idle capital or their dollar’s value and purchasing power erodes daily.

2. Principal number two, people with idle capital or savings lose to inflation.

So what are the options for all of us? Do we bury our head in the sand and wait it out?

Heck no! Let’s look at how to beat inflation….

Option 1 - Increase Fixed Income

Since having a fixed income losing to inflation, adjust your income. To beat inflation, a person or family must increase their income to match or outgrow inflation. So if inflation is 8%, an 8% increase in income is required to breakeven.

Now this can be done through negotiating a raise at your current job or finding a new job at 8% increase for example. It could be done with a side hustle or a family member returning to work. Put that kid to work!

Whatever it is, fixed income must be increased to beat inflation.

Option 2 - Invest idle capital

If idle capital loses to inflation, then make it active capital!

Rather than let capital sit in a savings account losing purchasing power and value, invest the capital into an asset or commodity that holds and increases in value.

This means investing capital into real estate, metals, agriculture, oil, etc. These assets will typically hold value against a falling currency and even provide a return on investment. This is why gold will typically rise in price during a recession as people place their capital into this more non-inflationary asset.

Whatever asset or commodity, idle capital must be invested for value preservation and return on investment to beat inflation.

Option 3 - Acquire Debt with Fixed Interest Rates

Yes, you read that right.

During a high inflationary environment, acquiring debt is good. Getting as much debt as possible is preferred for the smart investor and W-2 earner. Let’s look at this in an example :

Investor Jim buys a house at 5% interest rate while inflation is deemed to be at 8%. Jim is thus getting the house at a “negative real interest rate”, or a -3% interest rate. Essentially Jim is making near 3% of every dollar borrowed per year in this scenario. He is being paid to borrow the money for his mortgage.

Here’s the takeaway, having a debt rate which is cheaper than the inflation rate, means you are making money on the dollar. Paying your principal down will actually cost you money!

To add to this, I always suggest compounding your returns by investing in quality assets producing a return on investment AND having the benefits of good debt. Many of these are suggested in option 2.

So, to beat inflation, invest in quality assets with fixed interest rates lower than the inflation rate.

IN FINAL

There you have it, three ways to beat inflation! Of course, these aren’t the only methods but as this is an investing blog, these are front and center. Remember, you have the power to take action, even if it’s simply cutting back expenses, you can beat inflation.

Much success and Happy Investing!

P.S. If you want to learn more on the economy and monetary policy in a simple story book format, I suggest this very easy read “How an Economy Grows and Why It Crashes” by Peter Schiff.