Here's How To Capitalize On Rising Inflation
If there’s one thing I’m clear about during the COVID-19 pandemic, it’s this: we continue to confuse the money game. I say this because our government has pumped trillions of dollars into the economy, yet this has been done without additional value being created to match.
Money is a representation of value, so when you have one without the other (in this case, money but no value), it devalues the existing money that’s already in our hands. This is known as inflation, and as a result of this force, the middle and lower class get poorer, while the upper class gets richer because they’re playing an entirely different game than everyone else.
If you’ve been fortunate enough for the numbers in your bank account to stay consistent this year, get ready because the purchasing power of those dollars will be diminished. Knowing that inflation could come very soon, the question becomes: what should you do about it?
Is gold, silver, or cryptocurrency the answer? Should you pay off your mortgage? Is it all just hopeless? In this article, I’ll break down how you can use inflation to your advantage—because if you don’t, it will rob you of the value of your money and diminish your quality of life.
Should You Rush to Pay Off Your Mortgage?
Whenever inflation becomes a hot topic, one of the questions I get most often is, “Should I try to pay off more of my mortgage?” While it seems counter intuitive at first, inflation is actually good if you’re carrying a mortgage. Here’s why: as inflation rises, wages typically rise to keep pace. So ten years down the road, your $1,500 mortgage may only feel like paying $750.
Why? Because you’re earning more money, but your payment has not gone up.
I’ve also written before that trying to pay off your mortgage early traps your money in “equity jail.” In the midst of this financial crisis, millions of people are now skipping their mortgage payments because of job loss or loss of savings. If you found yourself in that situation and you’d made extra payments to try and pay your mortgage off early, guess what happens if the bank decides to foreclose on your house? They’re going to take your house and the equity with it.
After all, it’s there’s now because you locked that money in equity jail.
On top of a financial crisis caused by the pandemic, we have inflation looming as a result of trillions being pumped into the American economy, so the average American is likely to get hit from both directions: fewer dollars coming in and their dollar not going as far. Now more than ever, you want cash on hand (liquidity), so don’t rush to pay off your mortgage early.
What’s Your Investor DNA?
Many of the strategies we’ve been using aren’t going to work as well in the future because of what’s been done to the economy: certificates of deposit, low-yielding bonds, money markets, or mutual funds are almost certainly going to have their future value hammered by inflation.
This is also the right time to acknowledge that nobody is going to save us from what’s coming. We’ve been fed a lie that we don’t need to worry about what happens to our money or exert any effort; if we just hand our money off to the right financial planner, it’s all going to work out.
Well guess what? It hasn’t worked out so far and it’s only going to get worse moving forward. If you want to prepare for rising inflation, it’s on you. So, the first piece that has to be figured out is your investor DNA: where do your abilities and skills overlap with your interests? For some, that’s real estate, which is an asset that typically appreciates alongside inflation. My Investor DNA doesn’t include real estate—I don’t like it, nor do I want to better understand it.
But you might enjoy buying properties and all the legwork that comes with it. If so, that’s great! How can you use this time to increase your knowledge and your skills so you deliver more value and therefore have more value come back to you in the form of more income?
Another asset that sees its value rise with inflation is a business. We are trained from an early age on how to buy a home, and when the time comes, we know what the process will require of us to get ready for that purchase. Many of the same preparations apply to buying a business, and in the next decade, 418,000 businesses per year are going to be sold. It’s one of the greatest opportunities of our lifetime, and if you’ve bought a home, you’ve done much of the work needed to buy a business. Now is the time to close that knowledge gap.
What About Crypto, Gold and Silver?
When our collective confidence in the American economy gets shaken, many people run to alternatives that feel more secure. Today, those alternatives include cryptocurrency, gold and silver. Many people want to know: should I start considering alternative investments?
While it’s still too early for most people to invest in cryptocurrency due to its highly speculative nature, now is the time to start learning about it and the underlying technology, blockchain. There are still many questions to sort out with crypto, but it’s not going away.
It reminds me a bit of twenty years ago when we didn’t really know what the internet was or how it worked. Today, the internet is so ingrained in our lives it’s hard to imagine living without it.
I view cryptocurrency the same way. That said, for the average person to be buying and selling crypto right now reminds me of something else: people dabbling in the stock market who have no idea what they’re doing. Typically, those people wind up losing their shirt. If your Investor DNA includes crypto, that’s fine, but otherwise, I recommend just studying up for now.
Gold and silver has consistently been the fear mongerer’s treasure trove—when things are bad, just run to gold and silver! But the reality is it ebbs and flows just like everything else, and if you don’t understand why or can’t differentiate a peak from a trough, your money is at risk.
The argument for gold and silver that they’re finite resources ignores the fact that many people buy paper-backed gold and silver. If everyone holding one of those certificates went to redeem them at the same time, there wouldn’t be enough gold and silver to go around.
Gold and silver might be an asset that stores value better than the dollar long-term, but my preference would be to have an asset that creates cash flow and helps me achieve economic independence, rather than simply staving off the total erosion of my dollar’s value.
As the cost of basic goods and services that are essential to our lives become more expensive, I want to have more cash flow to cover those expenses because then my active income can be used to build more cash flow. It’s this snowball effect that crushes gold and silver as an option when I’m trying to figure out how I’ll use my money to take advantage of inflation.
Does gold and silver have some merit as a hedge against inflation? Yes.
But as my main investment strategy, I’m looking elsewhere.
What Action Will You Take?
Money represents energy from the past and its value in the future has many eroding factors, more so than factors that will grow it. This means combating inflation requires action. Sitting on your hands or trusting someone else to fix the problem isn’t going to work in the long run.
Now is the time to learn your investor DNA and acquire assets—that’s how you win. The federal government might not be interested in adding value as it adds money to the economy, but you can make value creation your mantra. The keys to value creation are simple:
Our economy is artificially propped up right now by the money that’s been pumped in, but once inflation hits, the money that’s there is going to flow into the hands of those who are prepared to receive it. Acquiring assets is one way to combat inflation, but if you want to be one of those people the money flows to when the dam breaks, figure out how to create more value.