Either you don’t know what it means, or you have no idea how to protect your hard-earned cash from inflation. Inflation is something that comes in contact with everyone.
Rich, poor, unemployed or career driven. Each and every one of us has had to deal with it or are dealing with it on a daily basis. Inflation is a very complex subject though, this is the main reason why people don’t want to deal with it or ignore it. In this article, me Andre Witzel will talk about what exactly inflation is and how to protect yourself from it. I am a full time trader and like to share my expertise with people like you, around the globe. If you want to learn about me or my work, please visit https://andrewitzel.com/.
How does inflation work technically?
In theory with all things in life the more there is of it the less it is valued. So the more money that enters the system the less one unit of it is worth. Why is gold so expensive? There is only a limited amount of it on this planet. Raising the price of it. With money, or currency this isn’t the case, they can just print more, “they” meaning the government. So the more of something that is in the world the less value it has. It’s pretty basic but it still causes a lot of confusion amongst people.
How does it work in practice?
In practice, inflation is not easy to notice in day-to-day life. This is where the danger lies.
From day to day life inflation is present though. All those little things are happening every day in the background, with us even giving it a single thought right?
If you see a purse for 1000 EURS of USD. The price might be 1070 EUR or US a year or a few months later. This is through the effect of, you guessed it: inflation. The value of money goes down so it gets compensated by increasing the price. On average, inflation rates have been around 10% per year historically. However this varies from region to region.
What does the government do to try to keep this down?
The government could raise interest rates, and to start selling off assets. The goal is to make it more expensive to borrow money to buy a house or a car or for a business to buy plants and equipment. And that will cool off demand in the economy, slow economic growth and slow inflation.
Is inflation actually bad?
Many experts say that, indeed, inflation is terrible and eats away at our honest money.
But is it actually bad? Well, if there were no inflation, then that would mean that our economy would come to a standstill. Inflation means that we are innovating, evolving, and moving forward as mankind. However, is the current inflation too high? Yes, it definitely is.
The inflation rate right now is higher than the rate our economy is growing, so this is where the problem lies. This is the reason why people are angry.
What can we do to protect our own money from inflation?
Well, there are many ways that we can protect our money from inflation, but not all are the same. People often think they are all the same, but they are not.
Saving money is probably the worst idea against inflation.
Saving money allows it to just be eaten away by inflation. Again, for example, if you save 10K next year, your money would only be worth 9900. So yes, saving money is leaving it out in the sun to burn away, year after year.
Investing in real estate is a great way to save your money from inflation. Investing in real estate averages around 9,5-11,2% ROI (Return on Investment) per year, beating inflation by quite a bit.
The same goes for investing in stocks or an index like the S&P 500.
The index, like the S&P 500, is an index fund of a collection of the 500 biggest companies in the US. In practice, you are lending out your capital and getting back interest on that.
The S&P 500 has been averaging 10,5%, so outrunning the inflation by an extent again.
So basically, this paragraph is about, invest invest invest?
Well, yes, historically, investing your money has been proven the only good way to beat the dirty “virus” called inflation.
Cryptocurrency and inflation
Now, this is an interesting one; bitcoin or any crypto coins have been deemed by experts as the perfect vessel to beat inflation since the supply is limited. Also, a reason bitcoin gets called “the digital gold”. Since the metal gold also has a limited supply.
Also, something worth mentioning is cryptocurrency staking.
This works pretty much in the same way, you lend out your capital, and you get rewarded for doing so with no to little risk to it. However, any cryptocurrency is always speculative and carries risk. The same goes for every other investment! It’s all risky. Investing in the government may be low risk, but not no-risk. The moment you got born, it got risky.
My personal take on protecting my capital of inflation.
I like to beat inflation by a margin and keep risks low. If you ever took any classes on investing your money, you’ll know what risk management means. Or another term we like to use is portfolio diversification. In layman’s terms, this means spreading your investments in different markets. Try using the 3 split strategy, 33% of your capital invested, for example, in the stock market, 33% in real estate, and 33% in cryptocurrency. You can switch this around and change the values how you like. I hope you get the idea. This, what I just explained to you, is one of the key fundamentals in the investing world. I am not saying you should be an investment broker tomorrow, but this is an extremely important practice to exercise.
Other alternative ways to protect your money from inflation
Do you think all the above-listed ways to protect your capital are boring?
Well, believe it or not, there are only 13,665,475 accredited investor households in America. Roughly 10.6% of all American households were accredited in 2020.
So you are not the only one who finds investing boring or not worth the time.
However, there are plenty of other ways to protect your money from inflation.
Starting an own business is a form of that. When you start a business you take your current capital to buy things, machines whatever that will make you more money down the line.
You spend all your money in the current moment thereby avoiding it getting worth less in the future. Spending your money is technically investing, too. You are injecting your cash back into the economy by buying the stuff you need to start your own business.
Another way would be through something called “peer-to-peer lending”.
You put your capital out there for people to use, and they will pay you back with a nice interest rate. You could argue this is identical to regular investing, and I would agree to some extent, but the risks are different, and you are lending to a peer, not a company or corporation.