There’s been a lot of talk recently about spikes in inflation (at least in the US). There are a lot of factors that cause prices to increase, but most of those things are outside our control.
As prices rise, we must find ways to change our spending habits and/or increase our income in order to survive.
I will be documenting my three primary strategies to prepare for, fight and survive the effects of inflation. And they are:
- Monitor your spending and foster good spending habits
- Constantly fight to improve your cash flow situation with three strategies
- Invest every dollar you can spare to ensure your long term security from inflation
The key to improving your financial status is to continue learning and investing. If you sit idle for too long then inflation will catch and surpass your finances until you find yourself struggling to get by.
How Inflation Affects Individuals and Families
Often, inflation in finance is defined as the decrease in purchasing power for a given currency over time.
But in practice, inflation describes the fact that the things we buy become more expensive over time. Years ago you could buy a gallon of gasoline for $1.00 and today it costs over $3.00 to buy a gallon of gas. At some point in the future it may very well cost over $4.00 to buy gas.
This is one example of inflation.
The cost of living
But inflation refers more generally to the cost of living. That means it represents the combined cost of all kinds of things that individuals and families spend money on.
I like to think of it as the average size of a budget. Regular people must spend money on:
- Housing (rent, mortgages, taxes, home insurance)
- Entertainment (movies, streaming services, concerts, sporting events, etc.)
- Utilities (water, electricity, internet, etc.)
- Travel (airfare, car rental, etc.)
And the list can be much longer than this.
Inflation basically makes it harder and harder to survive on the same amount of money over time. If you are unable to increase your yearly earnings, you will find that over time you must make do with less and less.
And this is the ultimate effect of inflation on individuals and families. So in order to combat inflation over the course of your life, you must find a way to earn more money.
1. How To Prepare For Inflation
I’ll repeat this a few times today, but inflation is always happening. It’s a constant force where goods and services are always getting more expensive over time. However, it’s not a straight line. And it doesn’t affect all products the same way.
I’ve already stated that really the only way to counter inflation over time is to earn more money. However, there is another aspect of personal finance that is equally important, and that is how you spend the money you earn.
Nobody spends their money exactly the same way for 40 years. The way you spend money changes over time.
Track your spending
In order to effectively navigate inflation over time, you should have a good understanding of how you spend the money you earn.
There are many ways to do this, but I believe the best way is to have some form of a budget. I’ve seen at least 5 different ways to make a budget, but the least invasive of these is called a reverse budget.
The basic idea is that when you receive payment (from your job or investment or whatever) you set aside a certain amount of money for savings or investing, then the remainder is used to support everything else in your life.
I recommend taking the reverse budget one step further and at the end of each month, just documenting how you spent your money. Just looking at your expenses will give you a bird’s eye view of your general spending.
Monitor and prune your expenses
Now that you have eyes on your spending, you need to ensure that you cut the fat every so often. How common is it that you begin paying for something (let’s use Amazon Prime as an example) because you have an immediate use for it? Maybe you’re expecting to buy a bunch of gifts around Christmas time and you want the 2 day shipping.
But then 6 months goes buy and you’re not purchasing anything and you no longer need Amazon Prime, and you’re still paying for the service.
This kind of thing happens to me all the time. At least a few times a year. And if I didn’t monitor my expenses, I would end up spending a lot of money for no reason.
Another common occurrence is when you start spending more on something than you realize.
A good example is eating out. Maybe you like to cook most of your meals at home, but over the course of many months you start eating out more and more. If you’re monitoring your spending then you would start to notice that you’re spending more money on food than you intended.
Self inflicted inflation
These are examples of what I like to call “self inflicted inflation.” The cost of Amazon Prime didn’t increase, you’re just paying for something that you don’t actually need. The price of food didn’t increase, you’re just spending more money on food because of your spending habits.
So minimize the effects of actual inflation by avoiding self inflicted inflation.
In my opinion, the best way to prepare for inflation is to keep watch on your expenses and ensure that you have consistently good spending habits.
2. How To Fight Inflation While It’s Happening
Again, inflation is really something that continues to happen over time, but there are absolutely peaks and valleys. And once you’ve gotten through a peak, you’re left with prices that are significantly higher than what your budget was built around.
When there is a big spike in inflation, the primary challenge for individuals and families is cash flow. Cash flow is just the amount of money coming into your bank account vs the amount of money going out.
The fight is keeping your bank account in the positive, and maintaining positive cash flow (more money in than out) is how you win the fight.
Maintaining positive cash flow
There are three ways to improve your cash flow situation:
- Decrease your expenses
- Earn more from existing income sources
- Create new income sources
These three ways are listed in order of difficulty. The easiest way to improve cash flow is to decrease expenses. There are a number of ways to do this, such as consolidating loans, cancelling subscriptions, shopping rates for insurance, and budgeting.
Next easiest is to earn more from your existing income sources. This includes things like negotiating a raise, getting a better cash back credit card, and raising rates on your side hustle.
Usually, the most difficult way to increase cash flow is to create new sources of income. This would include things like buying a rental property, starting a business, and blogging. But there are some easier ways to create new cash flow, like buying dividend stocks or purchasing a business/website. These ways generally require large cash investments, though.
Of course there’s always the brute force method of getting a second job, but obviously we’d prefer to avoid that if possible.
And here are dozens more ideas in increasing your personal cash flow.
When you have cash reserves
Creating extra cash flow is always easier when you have cash reserves. You have so many more options.
It’s not difficult to bring in extra money by investing your cash reserves. Now I know there are a lot of opinions on emergency funds, but I’m not getting into that here. It’s up to you to prioritize emergency funds vs. added cash flow.
By far the easiest way to invest is stocks. They require very little effort to buy and it’s a very passive investment.
But keep in mind that stocks are likely to net you less than 5% cash on cash return (a measure of cash flow return on investment), while more active investments like real estate or business purchases can give you 20%-50% cash on cash return.
When you don’t have cash reserves
But most people don’t have $20,000 plus lying around to invest. We have to be more creative to improve our cash flow situation. You’ll have to rely on your blood, sweat, tears and your wits to manifest the money.
When you’re in a difficult spot regarding cash flow, always scrutinize your spending habits and find ways to reduce your overall expenses. You can almost always find ways to decrease your current spending.
Sometimes you must get creative. For example, bulk meal planning can save you 20% or more on your food bill. Obviously you can often save money buying in bulk, but more importantly, you can reduce your food waste.
How often do you throw old food out from your fridge. Meal planning can almost completely eliminate buying food that you eventually throw out.
Or what about biking more often to save money on gas? Or canceling Netflix and taking up more opportunities to read books from your local library? Maybe you can’t get paid more at work, but you could work from home 1-2 days a week while you watch your kids and save money on child care.
The possibilities are endless and limited only by your creativity and desire to hustle.
The overall inflation strategy
The long and the short of it is you have to find ways to decrease your spending and increase your earnings when you’re fighting through inflation.
Here are some more articles with lots of ideas:
- 50 ways to increase your personal cash flow
- 50 ways to make money while you sleep
- 50 ways to invest
- 20 ways to make an extra $250 a week
- 50 ways to get the money to invest
And there are surely hundreds of ways to improve your cash flow situation that I haven’t thought of, and that may apply to your unique situation. If you spend time studying your earnings and expenses, I promise you’ll come up with some ideas that suit you.
3. How To Survive Inflation Long Term
So remember that inflation is a constant force in macroeconomics. Prices for various products are always changing, and over time everything gets more expensive.
As you live your life, you’ll need to continue to make more money. And the sad truth is that you can’t always count on your employer to raise your wages to keep pace with inflation.
This is where an investing strategy comes in.
The average rate of inflation is between 3-4 percent in the US. In order to beat inflation, your investments have to get an ROI above 4%. This is very possible, as long as you have an effect strategy.
Everyone can beat inflation long term if they increase their income by investing.
Creating an investing strategy
When you’re just trying to make it to the end of the month without going broke, you have to get scrappy. You have to find ways to decrease your expenses and increase your earnings.
But when you look at the long term, it’s important to invest.
Why do you think the rich stay rich? Do you think they sit on a pile of gold and cash like a dragon? Do you think they keep millions of dollars in their bank accounts to lose value to inflation?
They invest as much of their money as they can spare!
They buy stocks. They purchase profitable businesses. They acquire real estate. This is what the rich do with their money to ensure they keep their fortunes.
And you should be doing the same.
I don’t believe that a 401k is enough. You need to be investing outside of your employer’s retirement plan.
Invest to fit your preferences
Most people like investing in the stock market because it’s very passive. That’s great, but it doesn’t work for me because I want to retire very early.
My wife Kate and I invest in real estate and online businesses and in less than 5 years we’ve created over $70,000 in income from our investments. Good luck creating that kind of income from stocks in 5 years, unless you have over $1 million to invest.
Different strategies suit different people.
Many will like the passive, seemingly safer strategy of the stock market. Others will like the increased returns and tax benefits of real estate. And still others will want the astronomical return potential of business.
You won’t find advice for investing in the stock market on this website (at least not yet, because I haven’t begun investing in stocks yet). You will find lots of advice for investing in short term rentals on Airbnb, and some long term rental advice. I’ve only just begun writing about online business.
Whatever path you choose, it’s important to learn and act. Don’t get caught in the cycle of learning and being too afraid to fail that you never act. You must put yourself and your money on the line in order to win in investing.
Refusal to act is guaranteed failure in life.