How to Prepare for and Profit from Inflation

by Make Money

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Ever notice that the prices of things in the past seem super cheap compared to what you’re used to today? Over time, the price of goods and services increase little by little. This is called inflation.

Inflation affects everyone, and it’s not easy to outwit, but it is possible. If you’re wondering how to prepare for inflation, you’ve come to the right place. Some of the surest strategies for how to prepare for inflation are outlined below:

  1. Start and Keep Investing Regularly
  2. Money Market Funds or Treasury Inflation-Protected Securities (TIPS)
  3. Buy Real Estate
  4. Convert Adjustable Debt to Fixed Rate
  5. Purchase Commodities
  6. Find Specific Investments Sectors
  7. Convert Adjustable Debt to Fixed Rate
  8. Put Extra Cash to Work
  9. Buy Non-Perishable Items
  10. Two Pitfalls to Avoid

What Is Inflation?

Inflation is when your money loses value, usually seen with the general increase in the price of goods and services.

Because of inflation, the average good and service price doubles every 20 years. You may not notice this increase from one year to the next because prices creep up slowly but steadily.

Rising costs in a specific area might not be inflation. Sometimes it’s from supply and demand being unequal. With a low supply and high demand, prices will always rise.

Inflation impacts Coffee Cost

Inflation is broader than just unbalance supply and demand. It’s where the price of almost everything rises, even if it’s only slightly.

This loss is called purchasing power or spending power – how much your dollar will buy. As the dollar loses value, you can suddenly buy fewer items with the same dollar.  

Why Is Inflation A Problem?

Inflation is a problem because your money doesn’t buy as much as it used to – everything gets slightly more expensive.

A trip to the store that used to cost $50 now costs $55 or $60. A tank of gas used to cost $20 and now is $25. When you have so many of these $1-$5 increases, you realize that what used to buy a lot now buys less.

For example – $20,000 in 1950 could buy you a house. Today, that’s not enough for a down payment for the same property. That $20,000 used to get you a lot more than it does today.

Inflation becomes a problem when you have a tight budget. It reduces the margins you have. If your salary doesn’t increase with inflation, you’re in trouble.

Inflation also hurts anyone who’s saving a lot of cash. If you have $1,000 in the bank over time, it will buy significantly less than it used to.

When inflation gets entirely out of hand, you get situations like Venezuela. They printed so much money that it became worthless (the more you print, the less each dollar is worth). During an inflationary period in 2018 a chicken in Venezuela cost 14,600,000 bolivars – the same as $2.20 in USD. You don’t want this problem!

Inflation Impacts the Cost of Chicken
A chicken cost 14,600,000 bolivars in 2018

Ways to Fight Inflation

Thankfully there are ways to fight inflation. Each strategy has its pros and cons, but they all have the same goal: to grow your money faster than inflation.

You can think of it like this:

If someone took a quarter a day from your bank account, you might not notice. It would be easy to miss, and you might assume there was an error. In a week, that isn’t that much. But in a year, it’s almost $100. If that happens again the following year, but it’s a quarter and nickel, now you’ve lost $110. After 20 years, that money really starts to add up!

The only choice is to find ways that your finances grow faster than inflation or inflation hedges to keep your money worth the same amount.

Start or Keep Investing Regularly

The simplest way to fight inflation is by investing regularly in the same asset. We suggest low-cost index funds. The strategy is easy.

If the stock market goes up, you invest like usual.

If the stock market goes down, you invest like usual.

There is no variance with you because you are as steady investing as the sun rising and setting every day – you just do it.

This consistency is called “dollar-cost averaging.” You will buy the market highs, lows, mediums. With this strategy, you don’t try to “time the market” by buying only lows and selling higher. Regular purchases reduce the impact of emotional (and volatile) investing.

On average, stock prices move up and have done so for decades. Each year, the rate of return is about 10% which will beat the average inflation of 2%.

There are seasons of recession, depression, or higher inflation, but dollars invested will grow over time. If you stay the course, there is a very high (nearly guaranteed) chance you will be rewarded and beat inflation.

Money Market Funds or Treasury Inflation-Protected Securities (TIPS)

Money market funds (also known as money market mutual funds) are easy to buy or sell and focus on short-term investments. Funds typically buy high-quality cash, cash equivalents, and short-term “safe” investments (like U.S. Treasuries). They have low levels of risk and are well built to at least keep up with inflation. You won’t make a ton of money from them, but your purchasing power will stay steady. Most banks offer an account like this, or you can buy them through a broker.

Treasury Inflation-Protection Securities (TIPS) are built to counteract inflation. They pay out a fixed rate every six months and adjusts for inflation twice a year. In doing so, they provide more power than traditional bonds and increase in value. You can buy TIPS directly from the government or through a bank, broker, or dealer. 

Buy Real Estate

Real Estate fights inflation in a couple of ways. First, it historically keeps ahead of inflation. On average, home values increase at 3.5%-3.8% per year. This growth is ahead of the average 2% inflation. Second, as inflation rises, so do property values. In fact, inflation may cause higher yields than normal to keep pace with inflation! Third, inflation devalues debt over time. Let’s look at how debt devaluation occurs with a mortgage:

John bought a house in 1960 for $12,000 when he made $6,000 per year. As inflation went up, Grandpa started to get paid more. Each year he gets a small raise, but his mortgage payment stays the same. Twenty years later, he’s making $22,000 per year and can easily afford the payment. 60 years later in 2020, he sold the house for $368,000.

This triple threat of being ahead of inflation, rising valuation, and devaluing debt, means merely paying a mortgage helps increase your wealth over time. If you own rental properties, you get a bonus. The increasing property value raises what you can charge for rent (on top of selling the property ahead of inflation).

You can directly buy real estate – residential or commercial – or invest in REITs (Real Estate Investment Trusts). A REIT trades similar to stocks and may own a percentage of dozens of houses or apartment complexes. REITs are easier to exchange, and you can invest with little money.


Fundrise

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Find Specific Investments Sectors

Not all investments are equal during inflation periods. Many invest in high-growth stocks, dividend stocks, or equities which are great during bull markets (when the market grows consistently). But as inflation gets higher, it can hurt your returns.

To protect against inflation, look for things that are almost always needed for the human experience. You can invest in areas that tend to benefit from inflation like;

  • Food – we need to keep eating!
  • Energy and Utilities – water, electricity, oil, etc.
  • Healthcare – treating the sick and medial innovations
  • Building Materials – lumber, concrete, drywall, etc.
  • Technology – we will always continue to push boundaries.

These rise with inflation because they are needs, and people will pay for them.

You can buy these through specific EFTs on the market. Here are a few to choose from:

  • Energy Select Sector SPDR ETF (XLE)
  • S&P Oil & Gas Exploration & Production ETF (XOP)
  • Vanguard’s Health Care Index Fund (VHT).
  • US Concrete (USCR)
  • Vanguard Information Technology EFT (VGT)

Once you have identified what you want to buy, you can purchase it through any broker and most investing apps.

Acorns

Acorns helps you grow your money, one penny at a time. They round up each purchase that you make to the nearest dollar and invest the difference. If you buy a bag of chips for $1.25, they charge you $2 and invest the 75 cents for you which can be great for those looking for a passive investing strategy. It is easy, innovative, and trusted by leading investors.

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Betterment

Betterment wants to make investing easy. Sign up, select your risk profile, and Betterment starts investing for you. Betterment buys Vanguard funds for you so that investing is as easy as possible. Besides, they have built a way to minimize your taxes while maximizing your growing investments. 

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Charles Schwab

Charles Schwab offers anything and everything you need to retire. They charge $0 when you buy stocks, ETFs, options, or mutual funds online. Plus, there are no trade or account minimums. They have automated robo-investors that help you build and automatically invest for you based on your goals. 

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E-TRADE Financial

E-Trade is Kiplinger's #1 rated mobile app and #3 overall. E-Trade is a pioneer in free to low-cost trading. They offer ways to save, invest, borrow, and plan for retirement all on one site. 

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Robinhood

Robin Hood is a free investing app where you can buy individual stocks and ETF’s. You can fund your account, trade in real-time, get access to data, and build your portfolio. Swipe to make a trade during a break at work, or sit down and figure out how to make money with your investments – short or long-term.

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TD Ameritrade

TD Ameritrade makes you a smarter investor. According to Stockbrokers.com, they give you tools to make $0 trades and are the #1 overall stockbroker. They offer every investing option imaginable.

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Vanguard

Vanguard allows for all sorts of retirement accounts and ways to invest. You'll pay $0 when you buy or sell any Vanguard mutual fund or ETF in your Vanguard account. And your online trades for non-Vanguard ETFs are also commission-free. You can buy individual stocks and other ETF’s to your portfolio to grow your assets. Vanguard helped originate the index fund and attempts to have the lowest fees of any investing company.

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Wealthfront

Wealthfront believes that banking and investing should be effortless. To make that possible for you, they organize your paycheck into an automated system to take care of your life – bills, rent, safety deposit transfers, and investing. In addition, they work so that every dollar in your savings account is earning you money, more money than keeping it in a traditional savings account.

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Purchase Commodities

Commodities are raw materials or agricultural products that can be bought and sold. Examples are grains, fruits and vegetables, precious metals, oil, natural gas, and livestock.

Commodity prices tend to rise with inflation because we need raw materials to produce everything. Everything requires raw materials, so as inflation increases, commodities can be a haven from inflation. They will generally keep up with it and remain profitable.

Because commodities are physical products, some can be purchased and held yourself, while others are best through an ETF. For example, you can’t buy a barrel of oil and keep it in your basement, but you can buy silver and gold easily. If you can’t buy direct, buy companies that produce that commodity, or invest in commodity funds. Before investing be sure to look at past performance, specifically during higher inflation years.

  • US Oil Fund
  • SPDR Gold Shares ETF
  • Alcoa (Aluminum Company)
  • US Steel (Steel Company)
  • SPDR S&P Metals and Mining ETF
  • US Commodity Index Fund

Convert Adjustable Debt to Fixed Rate

Some loans have variable rates. If you have this debt, you’re in trouble during inflation. If you are unprepared, the lender will increase the interest to keep up with inflation – they’re trying to make money too after all!

When you shift debt to a fixed rate, the lender cannot change the interest rate. In the long run, inflation will make it easier to pay off your debt. You can apply this to a mortgage, credit card debt, student loans, anything that offers a fixed rate. As your debt loses value from inflation, you end up paying it off “cheaper.”

Put Extra Cash to Work

Before inflation hits, it’s good to have some cash that you can use in emergencies. And after you hit that comfort amount, give every extra dollar a job to work for you.

Putting the cash to work for you can mean a lot of things. It means investing in one of the assets listed. That can be starting a business. If you have a low-risk tolerance, put your money in a money market fund or TIPS, both of which will give you decent returns.

Think of it this way – every dollar you don’t give a job to will slowly lose how much it’s worth. Each dollar in your savings account next year will have the buying power of $0.98. The year after that, $0.96. You’ll slowly be losing buying power every year.

Buy Non-Perishable Items

Food prices go up and down just like the rest of the market. Before inflation hits, buy non-perishable items you use in bulk. You get these items at today’s prices to protect your future dollars.

Can foods that you eat throughout the year, buy fruit on sale and freeze it, and store up anytime you find a bargain at your fingertips.

If you decide to go all out on food storage, a year’s worth is possible. While you’re at it, don’t forget to store water.

As food costs rise, you have plenty on hand to make your staples and incorporate them into your regular grocery shopping.

Two Inflation Pitfalls to Avoid

When fighting inflation, there are a few pitfalls to avoid.

The first is having long-term fixed-income investments. You will get the same amount of money from this account every month (or year). They do not have great inflation-fighting power because, over time, this income will purchase less.

As the years march on, your purchasing power goes down, and you may no longer be able to afford the life you want on a fixed income. This problem can be especially difficult for retirees.

The second mistake is pulling all money from investments. Rarely is this the right strategy, but people do it because of fear. The market always recovers with time so when you pull everything out, you’re buying high and selling low. If you can stay the course and continue to buy during a high inflation period, you’ll end up buying low and once the market recovers, selling high!

Related Questions

What Should I Buy Before Inflation Hits?

It depends on your timeline. If you want something short-term, Money Market funds and TIPS are the best ways to start.

To fight inflation long-term, invest in another asset class like the stock market, real estate, etc. Here are 11 assets that can get you started.

What’s the Best Investment to Beat Inflation?

If you get the chance, real estate may be the best place to land. House prices tend to rise with inflation, and only one financial crisis in recent history affected the housing market.

What is Hyperinflation?

When the price of goods and services rises over 50% in a month (or over 1,000% in 12 months). A cup of coffee that used to cost $2 now costs $22 in less than a year. Hyperinflation can last multiple months, but generally doesn’t last longer than that.

What Assets Do People Buy in Hyperinflation?

Hyperinflation is rare, especially in developed countries. There is not much precedent for how to engage this because of its infrequency. We’d suggest you buy whatever assets you can afford that provide a steady cashflow to help you weather the storm.

How Does the USA Fight Inflation?

In the United States we have a central bank called the Federal Reserve. They check things like the Consumer Price Index (CPI) to determine if inflation is a problem The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services).

If the Federal Reserve notes that it is an inflationary environment, they raise the interest rates. As interest rates rise, less and smaller loans are given because the “price” of having those dollars is higher.

In a very easy way, with low interest rates, more people borrow. When it’s more expensive because of higher interest rates, people take out smaller and fewer loans, thus taking the edge off inflation.

Wrap Up

Inflation is the gradual rise of the prices of goods and services. Inflation hurts the money saved up in the bank and reduces your purchasing power over time. To fight this, regularly invest in assets that outperform inflation or specifically rise in value during inflation like real estate, TIPS, and commodities.

With just a little preparation, you can even benefit from inflation!

Alexander Newby

Alexander Newby

Alexander is a fully licensed financial advisor. His entrepreneurial spirit and a passion for the wealthy life have freed him to live a life he loves living. Though he faced plenty of obstacles along the way, he overcame. Through his struggles, Alex learned what it truly means to pursue the Wealthy Life in all the ways that matter most. He's been in pursuit ever since.

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