Beat Inflation with These Simple Rules

Every year the price of goods increase in value, this increase in value is referred to as inflation. If your money isn’t at the very least growing at the same rate as inflation, you’re actually losing buying power with your money.

Let’s take a look at what I mean.

Say something costs $100 today, and next year it’s expected to cost $102 (if inflation rises 2%). If you have $100 today and you’re earning 0.5% in a savings account, your money will only be worth $100.50 next year, so you won’t be able to buy that specific item.

A lot of people view investing as a very risky and uncertain endeavor, but I would argue that not investing at all is more dangerous. If you’re not growing your money, you’re essentially losing it permanently. And making back money after you’ve lost it, is a lot harder than growing it in the first place.

Here are three of the best ways I believe people should do to at least keep up with, but ultimately beat inflation.

1. Invest In Stock Markets With Long Term Funds

The easiest and most straightforward way to beat inflation is to make sure your money is being invested in your best interest. Over the past 90+ years, the American stock market has averaged just over a 10% return per year. Whereas inflation increases around 2% a year on average.

With long-term goals, like retirement, we can take on more risk (or I like to say volatility), because if there is a down year we have a long time to recover from that loss and continue to build wealth. If you need your money 30 years from now, it doesn’t matter if in six years you have a down year of 10%. Investing has its ups and downs, but over the long term the good years heavily outweigh the bad, and our money grows.

When time is on your side, have your money in the most efficient place possible. The stock market has proved to be that place. In my experience with learning about finance and money. The biggest difference I found between the middle-class and the wealthy, is how they view money. The middle-class use money to buy things, never really putting it in a position to work for them. Whereas the wealthy always prioritize putting their money in a position to work for them, then uses the growth or returns to build their lifestyle.

If we are looking to create wealth, we have to look at money from the perspective of those who have built wealth. There’s no secret formula, it’s just making sure we are doing the most efficient things with our money.

2. Don’t Let Your Money Sit Idle

The number one problem I see with prospects and clients is a lack of how investing works, and because of this, people often hold a majority of their savings not in investments but in checking or savings accounts. After we discuss why this is a bad idea, they kick themselves over the years of wasted compounding opportunity.

I personally try to keep as little money in savings accounts as possible, because I know it doesn’t translate to long-term growth. But we all need to have some money readily accessible to us. If you do have money in savings accounts, whether it be for paying bills or short-term goals, ensure that it is in an account that will at least be doing something for you.

Generally, savings and checking accounts offer near to no interest, maybe 0.05% a year. It’s really important to understand where your money is, and if there’s a better option. If your money is sitting and not doing anything for you, see what other options there are. In my experience, try to avoid locked-in accounts, they have big penalties and don’t let you break the locked-in period. If you’re okay with your money being locked in for a period of time, you might just be better off investing it.

3. Own Where You Live

I don’t believe owning real estate is a good investment. The reason being is real estate typically grows at or close to inflation. To me, good investments perform much better than the rate of inflation. But with that said, I do believe there are a lot of advantages to owning real estate.

The first advantage is your payments. Each payment you make, a portion goes towards what you owe on the property. So with each payment, you’re building equity in your home, which ultimately increases your net worth. Also depending on how you structure your payments (fixed vs variable, and length of the term), you can lock in consistent payments. Rent almost always increases with each year. When I bought my house, I locked in payments with a 5 year fixed rate, and when I had to renew my mortgage a few months ago my new payments for the next 5 years are cheaper than the first 5. Imagine living somewhere, where your biggest monthly expense gets cheaper over time.

The second advantage comes into play once your mortgage is paid off. With inflation, whatever rent cost is today, in 40 years it should be about double — which is a scary thought with how tough rent costs are today. Having your mortgage paid off, and having no mortgage or rent payments during retirement is a huge advantage. It helps ensure that what savings you do have can go towards your lifestyle and cost of living. I see big advantages in homeownership over the long term.

About the Author

Derek Condon, CFP®

Derek Condon is a Certified Financial Planner and Mortgage Advisor specializing in financial planning, investments, wealth-preserving insurance, mortgages, and others. I help my clients with a variety of goals. From someone who is just starting their investing journey to a retiree managing their wealth. From a first-time home buyer to someone refinancing to get their very best mortgage. And, of course, everywhere in between.