Sean O’Connor from Blocknative Corporation talks about the basics of Cryptocurrency in this episode of Explain it Like I’m 5.
Is it just me or is my morning cup of coffee getting more expensive?
Yeah, no. It’s not just me because it’s probably been happening to you recently too. As of July 2021, the US inflation rate has increased to a whopping 5.4% — that’s a 13-year high.
That means life is definitely getting more expensive — and not just when it comes to your coffee.
In the most basic of terms, inflation is a measure of the rate of rising prices of goods and services in an economy.
A few years ago you could snag a basic cup of coffee for an average of $1.25.* Now it’ll cost you around $1.79.* (sneaky, right?)
*Oh, and if you’re in a big city like LA or NYC you’re probably playing closer to $3 or $4 🥴
This gradual price increase might not seem like a big deal, but when prices for goods and services rise without an equal rise in salaries things can get a little hectic. In the past, inflation has caused entire economies to crumble — we’ll be totally fiiiiine, though.
So why does inflation happen?
Well, inflation happens for a few reasons. Here are the main 3:
1. Cost-push inflation: Oftentimes inflation occurs when prices rise due to an increase in the costs associated with production of a good or service. Example: coffee beans start to cost more to import, therefore the price of your coffee increases.
2. Demand-push inflation: A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product. Example: A small biz that sells pottery resembling lips goes viral on TikTok. All of a sudden thousands of people want to order said pottery. Now that business owner can charge a premium for her product because the demand has been significantly raised.
3. Other factors like the housing market, government spending, central banks and a whole lot of other economic factors can also affect inflation… but we’ll save all that drama for another time.
Now that you know why inflation happens, here’s why you should care (and how to best protect yourself from it’s constant desire to wreak havoc on our already terrible spending habits).
How to protect yourself from inflation:
Inflation has a nickname and it’s: “The WORST Tax”. I know, you thought taxes were bad enough already, but here’s why inflation sucks the most:
Most people don’t even notice inflation. Well it’s either that, or they simply don’t understand how it’s affecting them — and their wallets.
Let me break it down…
Let’s say you earn 4% in a savings account (lol, typical savings accounts will only help you earn, at most, 0.6% right now). Okay so you’re earning 4% in a savings account dream world, and meanwhile inflation grows at 7%. This tends to make many feel 4% richer when they check their bank accounts, but in fact they are 3% poorer.
4 – 7 = -3 (Yay, math!)
Because the value of goods and services is growing by 7%, but your money is sitting there in a savings account only growing by 4% during that same period, you’re actually LOSING the value of your own money!
And this, my friends, is why it’s important for you to understand the causes and effects of inflation, and how to plan so you can make sure the things you own – your assets – maintain their purchasing power.
That’s where investing comes in.
Let’s get this $$$
Here are three of the most basic investment approaches everyone should consider as ways of protecting their hard-earned wealth from the rude nature of inflation.
1. Invest in Stocks
Stocks can be scary. Especially if you don’t know wtf you’re doing. If that sounds like you, check out our Investing for Beginners Course before reading the rest of this post.
Even though there is definitely some uncertainty when it comes to the stock market, owning some equities can be a killer way to combat inflation.
Think of yourself as a business. As inflationary pressures prop up prices, commodity prices will subsequently increase as well, and investors can get a good return on those investments.
There’s a LOT more detail we could get into here, but another good way to think about this is the simple (and pretty reliable) fact that, on average, the stock market trends up over long periods of time (think years, not months).*
The S&P 500 — a stock market index that measures the performance of about 500 companies in the U.S. — has never lost money over any 18-year period (um, jealous.) AND during the worst 30-year period in history, it still delivered 4.3% annual returns even after inflation, which was good enough to triple an original investment.
*And just because on average this fact rings true, you can definitely still lose money in the stock market if you don’t know what you’re doing (and a whole lot of other factors).
We’ll be developing even more content around stocks and investing in the future, but for now make sure you know the basics.
2. Invest in a Home
Yeah, this one’s pretty much a pipedream for most young people these days… but let’s say you ARE able to invest in real estate.
When you purchase a home, unless you’re somehow paying in cash, you’re probably going to put some money down and take out a loan, known as a mortgage, for the rest of the home’s purchase price.
There are a few different types of mortgages but the underlying principle is the same. You pay off a little of the principal each month until you own a debt-free asset that should continue to grow in value over time.
The process of buying a home is a LOT, so stay tuned for our course on first-time home buying coming soon.
The reason investing in a home can be a good protection against inflation is that home prices tend to increase in value on average year-over-year. However it’s worth noting that real estate “bubbles” — where home prices seem to skyrocket — are usually followed by correctional periods, which can sometimes cause homes to lose over half of their value (hello, 2008). But, on average, housing prices tend to increase over time, counteracting the effects of inflation.
Both investing in stocks in real estate are great options for long-term investment protection against the effects of inflation, but there is something you can do in the short-term, which brings me to #3…
3. Invest in You!
As cliché as it is, investing in yourself is one of the BEST and most sure-fire ways to be prepared for a financial future that might feel a bit hazy right now.
This investment in yourself can begin with a little bit of education and motivation. It might be a good time to learn some new skills, take a course or two (we’ve got quite a few helpful ones) and do some research in an effort to increase your future earning power.
Being able to stay on top of our world’s ever-changing needs by keeping your skills up-to-date and learning new ones might help your future salary or business remain unaffected by inflation.
There’s truly no better feeling than trusting yourself to make the right decisions when it comes to your finances.
You got this!
more articles to check out
Get your questions answered from our quick articles that simply explain concepts you need to know.
Nomadic Matt is a New York Times best-selling author and founder of the award-winning budget travel blog nomadicmatt.com. In this discussion we learn about his top tips & strategies to make travel more affordable!
Advice from Taylor of Imperfect Finance on how to pay off debt quickly! These are some creative and smart strategies to help you get your money in order.