This week on The Wealthy You!; Inflation protection.
Inflation protection on The Wealthy You! consists of both a defensive and an offensive component. In this segment we will cover the defensive side of protecting yourself from inflation. The offensive side of inflation protection will be covered once we begin the OFFENSE.
According to investopedia.com, money supply is the root of inflation. “An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy.” To keep things simple, the more money that is available to be had by people and citizens in a country, the more they will raise their prices on their products and services to capture more of it. This increase supply of money and the rising prices for products and goods causes the value of the dollar or the currency to drop. The more abundant something is, the lower its value. One American dollar is worth one American dollar in the American economy, there is almost nothing for sale for $1.00 or less in the stores in America today. If you can find something for sale at that price then you are looking at some cheap, mass produced item that is sold everywhere. 100 years ago, the dollar was worth more and could purchase more goods for you and your family, but there were far fewer dollars available 100 years ago. The more the dollar, or whichever currency that is being used, can purchase for you, the stronger the dollar or that currency is. The less it can purchase, the weaker it is.
Inflation can do some funny things like create a nation full of starving-billionaires and create novelty items out of their currency. It is extreme and rare, but it does happen. Hyperinflation is the cause of the starving-billionaires and novelty currency but it rains down destruction on the nation that is experiencing hyperinflation. It helped topple The Weimar Republic in Germany before Hitler and the Nazis rose to power, wheelbarrows full of cash was worth less than the wheelbarrow itself; Hungary experienced it after World War 2 when prices doubled every 15 hours, eventually becoming a part of the Soviet Union; in 1993, prices rose in the Federal Republic of Yugoslavia by 116.5 thousand billion percent, Yugoslavia no longer exists; Zimbabwe printed a $100 trillion Zimbabwean Dollar bill, it failed to purchase a single loaf of bread (starving billionaires), one American dollar was worth more than $100 trillion Zimbabwean dollars. And Venezuela is currently experiencing it as well.
When it comes to protecting yourself from inflation, the idea is to acquire things or assets that rises in value each year as the currency falls in value. When the currency falls, it requires more money to purchase the asset that you own or desire to purchase. In other words, it will take more money to purchase that piece of property you have been eyeing next year than it will need to purchase that same piece of property this year. Once you own that piece of property, it will rise in value each year in response to the inflation rate and you get to keep or own that value which helps protect you from inflation.
Keeping all your money as cash in the bank puts you at the biggest risk and exposure of inflation. Most bank accounts have an interest rate less than one percent but inflation has been 2-3%, money is losing value at a quicker pace than it is gaining value to offset the losses of keeping money in the bank. Keep emergency cash and your daily/monthly spending money in your bank, all excess should be converted to assets that rise in value over time, like real estate, stocks and gold. With DEFENSE, it is about keeping what you earn; purchasing real estate for a house to live in long-term and own will better protect you from inflation versus renting. Rent prices go up each year because there is more money to be had and limited supply of rental stock available. Once you start renting, you will be paying more to continue renting each year just to live there, that is exposure to inflation if your income can’t keep up with rent increases each year. If you borrow a set amount to purchase a home to live in long-term, the amount will be broken down into monthly payments for X amount of years. The payment wont change, but the taxes you pay might go up each year because the value of the home you own rose in value, even if the tax rate stayed the same it is being applied to an asset that is worth more than the year prior, that helps protect from inflation.
On August 15, 1971, Richard Nixon signed into law that removed the gold standard from backing up the U.S. dollar. This effectively created a currency without any legitimate and inherent value backing up the value of the currency, money became a fiat currency and money supply inflated immediately and rapidly shortly after signing that bill into law. When you walk into a bank or credit union you may see a sign or placard that states the deposit is backed and guaranteed by the Full Faith and Credit of the United States Government. That is the government saying your money will be safe because they say so, although there isn’t anything of significant value or that rises in value stored away to protect the value that exists in the currency. Since August 12, 1971, gold has increased from $40.95/ounce to $1,900.10/ounce on February 22, 2022, according to gold.org who started recording gold prices in January of 1970. That is an increase of 46X. In 1971, one US dollar could purchase $6.69 worth of goods in 2021. That is an inflation rate close to 600% or approximately 6X less valuable today than in 1971.
People and society tend to want more over time, converting your dollars into gold and other inflation-protection minded assets will give you more overtime than keeping your money as cash in the bank. Inflation is a very confusing topic and I only covered it briefly with this blog post. If you desire to learn more, then read books on the topic and look up information on the internet. It really is a fascinating topic to learn more about.
Next Week on The Wealthy You!; acquisition of defensive-minded assets
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