You can’t stop the waves but you can learn to surf. — Jon Kabat-Zinn
Everybody’s asking the question: “Is inflation coming, and what do I do about it?” It’s an important question. If you don’t understand inflation, it can be the secret destroyer of your wealth.
In this article, I’m going to answer three questions:
- What is inflation?
- What causes it?
- What can you do to protect yourself?
What is inflation?
Inflation is a general upward movement of prices.
That “general upward movement” may happen very quickly, since we passed one stimulus package back in April and probably have another one going through soon. That’s about $5 trillion getting pumped into our economy.
To put that in perspective, our national debt has hovered at around $20 trillion for a while. $5 trillion in stimulus checks means we’re getting 20% of our entire national debt flushed into our economy.
What causes inflation?
The thing about the stimulus checks is…everybody’s getting one.
Let’s say you get a million dollars, but then you find out everyone else in the country also got a million dollars. If everybody has an extra million dollars, all of a sudden the cost of everything goes up.
You want to buy a car, but so does your neighbor. He’s willing to pay a little extra so he can get it instead of you, so you try to edge him out, and the price of that car goes up. This works the same with real estate, gas, and everything else. Every dollar buys less than it used to buy because there’s more money out there.
The necessities will be impacted the most
Lower-income people are often hit the hardest by inflation. While everyone needs things like food, housing, and gas, not everyone is in the market for a private jet or a luxury car. Therefore, the basic necessities of life usually skyrocket a lot more than luxury items, which is bad news for people who are already in the bottom 20% of earners in our country.
Bottom line: You’ll notice the effects of inflation more at the grocery store than the car lot and more at the car lot than in high-end real estate. The higher you go up the ladder, the less you’ll feel it.
How interest rates affect inflation
Keeping interest rates down right now is also going to fuel inflation. Right now the Fed has gone down to 0%, so money’s as cheap as it’s ever going to be.
What fuels the price of a car, house, or anything else you have to get a loan for is the interest rate. If $1,000 a month will buy a $100,000 house, and that’s all you can afford, you’ll get that. But if $1,000 a month will buy you a $200,000 house, you’ll get that instead.
When the interest rates go down, the price of things we have to borrow money for goes up. This is fueling some of the demand we’re seeing right now in the real estate market. Also, many people aren’t selling their houses because of the pandemic, so there are fewer to buy. Plus, the Fed plans to keep interest rates at 0% for the foreseeable future. That will cause the price of a lot of things to rise.
So how do you combat these effects?
What you can do to protect yourself from inflation
There are certain things that go up in value and certain things that don’t go up in value when inflation happens. Real estate and stocks go up, but cash gets hurt. If you’re just sitting on a bunch of cash, what should you do?
You can’t take all your money and go buy real estate, because then you don’t have money to pay bills. But you also don’t want to be sitting on hundreds of thousands or millions of dollars in cash.
Have enough cash available for emergencies, but put the extra in other places that go up in value or earn a little bit more.
Here are some great options for what to do with your cash:
- Get the RIGHT type of life insurance policy that will earn up to 6% while being accessible the whole time (we help people set these up at Big Life Financial)
- Real Estate (Just make sure you have plenty of cash left over because real estate is so illiquid)
- Gold or silver
But let’s talk about the MOST important thing that nobody’s talking about, where you can do the most good and make prosperity happen as all this is going on.
The Most Important Thing You Can Do to Combat Inflation
Invest in yourself. No, really. Invest in yourself, your people, and your industry. Use this time to become better at what you do.
Continue to focus on growing your business and being as productive as possible. Don’t focus on the doom and gloom — focus on what you can do, not what will happen to you.
If your strategy is to wait for the government to come save you with another stimulus check, that strategy doesn’t work long-term. That’s not the game. That’s survival. Stimulus packages are great for people who have really had their legs knocked out from under them, like hotel owners who completely lost their livelihoods because of the pandemic.
But for 80% of the economy that’s still here and functioning, don’t sit on too much cash — invest in people, your business, and your knowledge base. Take responsibility for your own success no matter what happens with inflation.
That way, as prices go up, you can charge more for your products or services! You’ll just adjust with it. Plus, you’ll be providing more value with your increased skills. So you’ll be getting $1,000 instead of $700, but it will buy the same amount of stuff $700 did.
Where there is chaos, there is opportunity.
— Derick Van Ness
Have a surfer mentality and RIDE the waves of life instead of getting crushed by them. It’s very easy to fall into a victim mentality when things are happening with the economy, but where there is chaos, there is opportunity. By investing in yourself, your business, your skill set, your industry, and your team, you’ll be able to accelerate your results beyond what’s happening with inflation.
If you see the consumer price index starting to get up around 4% or higher, then maybe it’s time to consider adding a 4%, 5%, 10% price bump on the services or products that you offer. Look at it as a great opportunity for a price experiment.
You can ride the waves rather than be crushed by them
Inflation can work either for you or against you. You just want to make sure that you’re not working against yourself — which is what many people will do out of fear.
There’s always value in creating more wealth, building more productivity, and investing more in your business. When you stay focused on your goals and ride the waves instead of being afraid of them, the very waves that looked like they would crush you will take you exactly where you want to go.