How do you deal with inflation? Stop focusing on just investing!
It seems counterintuitive, but the reality is that depending solely on your investments to mitigate the risk of inflation is the third-most impactful way to fight inflation and the least controllable. While fighting back against inflation may feel like a losing campaign, there are a few other things you can do to try and stymie the effect of rising prices.
1. Create a new income stream
The world is quite a bit different than it was two years ago, and one of the biggest ways it has changed is how easy it has become to create an additional income stream. With e-commerce and the gig economy, we have seen people start numerous new businesses or create freelance work for themselves, and in the process, develop new income streams.
Are they all becoming millionaires? Absolutely not, but finding new ways to pad your bank account with a few hundred dollars here and there is another bill off the table — or another chunk of your debt cast away. How do you create a new income stream, exactly? Begin by asking yourself what you can be doing with a skill or your time to generate a new income, even if it starts at $100 a month.
We all have something that we’re good at. Can you monetize it?
2. Strike something from your budget
Lowering your expenses will inevitably fight inflation because you are buying fewer things — so, you’ll have more money. But when was the last time you really reviewed your monthly burn rate?
When you sit down to review your spending, begin to prioritize both your Past Choices (debt & bills) as well as your Present Choices (daily spend) — remember your money buckets!. As you begin to mark these items down with a 1,2,3, etc., you will begin to see that your subscription to that organic dog food company may not be as vital as you originally thought.
Challenge yourself to remove whatever the last items are on both lists, and immediately, you will start to fight back against inflation, as well as the monster called “lifestyle creep.”
You can see how controllable the first two recommendations are and why they precede investing.
The truth is few students or young professionals have enough of an investment account to truly diversify inflation risk away. Try to use tip #1 by increasing dividends, or tip #2 by reducing your fees. But two basic ways to fight inflation through investing are through equities and real estate.
Equities, in this sense, mean stocks, because the premise of a business is that it exists to create a profit. Regardless of the external factors, a business will prevail. If you are a part-owner of these businesses, the profit will be shared. So, stocks pay their owners by appreciating, and through dividends.
Real estate can be both personal or professional, but if you are able to lock in a fixed interest rate on a mortgage then the rising tide of inflation will not impact your payments. Plus the home value hopefully will still be increasing with time.
Inflation is the “worst tax” because typically it goes unnoticed. That is not the case today, because right now it is very obvious and very real.
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- Money Earned vs. Money Created
- “Money Buckets”: The 5 Choices You Have With Every Dollar You Earn
- Bank On It: Why You Should Open Up a Bank Account