You can make money with your mind, you can make money with your hands but one way that most people overlook when it comes to making money is making it with inflation. If you’ve turned on any financial news lately, you can’t miss experts talking about inflation. For the average person, inflation is just a financial consequence they must bear; however for the financial elite, it’s another opportunity to make money. If you want to be in this second group then you’re in luck because we will now get into 5 ways to make money with inflation!
Now, before we get into how you can use inflation to improve your financial position, I have to make sure you and I are on the same page as to what inflation really is. I know you’ve heard about it before and know that it can affect your finances in many ways but just so we’re clear let me briefly define what inflation is. Inflation is a sustained increase in the price of goods and services which in turn reduces the purchasing power of the money you have.
Examples of this are when you go to the store and milk and bread have now shot up in price meaning that your grocery bill just got a bit more expensive. Because of inflation, you’re now going to have to hand over more money for the same goods you used to be able to buy with noticeably less money.
The next question we must answer before I explain how you can profit from inflation is why the hell do we have inflation in the first place? I mean, do prices really need to ever go up? I don’t know about you but I prefer to pay less when I go to the store or shop online and I’d be willing to guess that you feel the same. Well, inflation is a by-product of three financial phenomena with the first being demand-pull inflation.
Types of Inflation
Demand-pull inflation takes place when more money becomes available, which we’ve seen recently through the printing of trillions of dollars in the United States in the form of stimulus checks and other governmental programs. In effect, people have more money to spend and this increases demand for goods of which supply can not always be met which drives up prices.
Then there’s cost-push inflation which is the direct result of production costs rising. Think about how limited natural resources like lumber have been over the past year and how their rise in costs have affected the price of homes in the real estate market. I know personally I’ve had a lot of friends simply get priced out of the market because even the most basic of homes these days are outrageously expensive. This rise in prices is not only being driven by increased input costs but people’s willingness to overpay just to be able to get into the market.
Finally, there’s built-in inflation. Kind of like how you expect your girl to give you shit if you like another female’s picture on Instagram, you also expect your salary to rise as the cost of goods around you go up. However, of course this is a double-edged sword because if all of a sudden your employer has to pay you more, then in turn, prices will go up which will prompt people to ask for more money again and the cycle repeats itself into perpetuity. In fact, this is one of the main reasons the price of goods and services will always rise over time.
As you can see, there are a lot of reasons why prices go up and let me tell you they are all unfortunate to experience. Now that you know what types of inflation exist, one thing you must be acutely aware of are the levels in severity of inflation. You see, not all forms of inflation are created equal and generally the more aggressive inflation is, assuming your assets do not rise in equal proportions, will make you poorer over time. So, to be able to profit from inflation, you must first be able to identify when you’re in its presence.
Speeds of Inflation
Generally speaking there are four speeds at which inflation works and the first is creeping inflation. No, not the creeping you do on Facebook to see how your high school ex is doing 10 years later. This creeping takes place when inflation is mild and less than 3% a year. Generally, the Federal Reserve uses a 2% inflation target and as such we typically operate in a state of creeping inflation whether we realize it or not.
Next, there’s walking inflation. Why creep when you can walk right? Walking inflation takes place when inflation rates are between 3–10% and when this level of inflation takes place, people start stocking up on goods to avoid future price rises. This is when you see shows like Hoarders come back in style as people can feel better about themselves for having bought 10 packages of toilet paper by watching people who are worse hoarders than they are. Now that you understand how inflation works, you’ve probably come to realize that as people start driving up demand for goods, this only makes inflation worse which is why walking inflation is generally seen as a slipper economic slope.
Next up, we have galloping inflation. This is where inflation is 10% or more and this is where trouble really starts to take place. At this point, prices are rising at a rapid pace and people are feeling a major pinch in their pockets. In fact, with galloping inflation, it gets so bad that people will start to question the decisions of their political leaders for letting their economies decline in this way and even foreign investors begin to lose interest in these markets. Now, if you’re under 40 and live in the West then you have yet to live through this aggressive of inflationary times but I’m sure if you asked your parents they would tell you how punishing it can be living with double digit inflation.
Finally there is hyperinflation. This is where prices skyrocket by more than 50% a month. Sometimes when I see my heating bill at the start of winter I wonder if we are in a state of hyperinflation but then I just realize that I just haven’t had my heat on for the last 6 months. Bad jokes aside, hyperinflation is the ultimate form of inflation punishment however it rarely takes place. In fact, the last time the US experienced hyperinflation was during the civil war so while nothing is impossible, chances are you won’t experience hyperinflation in your lifetime.
Now, at this point, you probably know more about inflation than 99% of people on Earth. While I wouldn’t exactly brag about this on your next Tinder date, it’s useful to know what inflation is and what causes it.
The unfortunate truth is that most people go through life never knowing what inflation is and how it affects their money. All they know is that getting ahead financially gets harder by the day and in many cases, people give up on themselves and turn to unnecessary spending to soothe their emotional troubles. As you can imagine, this just adds fuel to the money burning fire and is far from an enviable position to be in. Fortunately, you know what signs to look for when it comes to inflation and in a second, you’re also going to become an expert in profiting from these harder financial times as well!
If you ask me, there are really two ways to combat inflation. The two strategies come in the form of asset management and income management. Let’s first go over a few situations where managing your assets will be crucial to getting ahead during inflationary times then we will dive into how your income will ultimately affect your financial success.
Number 1: Tackle Variable Debts
So, the first way you can protect yourself against inflation increases is to tackle your variable debts. You see, interest rates and inflation are positively correlated which means that as inflation rises, interest rates rise as well but more specifically variable rates go up. If you have a variable mortgage for example, then paying down your mortgage is one way you can protect yourself against sudden interest rate hikes. Now, if you have a fixed mortgage don’t think you’re invincible to inflation and its associated interest rate increases. If you have a fixed-mortgage, you’ll know that your mortgage rate is only locked in for a specific term which means that when the term ends you’ll be up for renewal and increased interest rates will be coming your way too so again get ahead of your debts as you start to see inflation rise in the economy.
Number 2: Avoid Holding Cash
The next thing you want to do when inflation is rising is avoid holding cash for long periods of time. If you’ve been following me for a while now you’ll know that I think you should only be holding cash for emergency fund purposes. This is because the longer you let your money sit idle in the bank garnering no returns the more money you let erode to inflation and as you probably guessed, the higher inflation rises, the quicker your idle cash disappears.
For instance, if inflation is 2% and you are getting a negligible rate of return on your cash then you’re losing a full 2% but that loss doubles when inflation rises to say 4%. Now, keep in mind that I didn’t say you shouldn’t be holding cash at all. I specifically said you should not be holding cash for long periods of time because in fact as inflation rises, the stock market often experiences tumbling prices. This presents a golden opportunity to buy your favorite stocks at a discount and enjoy great returns once they recover.
Number 3: Capitalize On Available Assets
Finally, let’s talk about one opportunity that will present itself during times of higher inflation that, if I’m being honest, may or may not sit well with you. You see, as I mentioned earlier, interest rates on mortgages will rise as inflation increases and as you probably know, the recent basement low interest rates were a major reason people could afford to get into the housing market in the first place. Well, with rates going up, naturally some people are going to be forced to sell their homes because they can no longer meet their mortgage payments now that their interest charges have increased. Therefore, as someone who’s been holding cash, this presents a bittersweet opportunity to take advantage of rising inflation — even if it comes at the cost of someone having to give up their home.
So, as you can see, during times of inflation, many opportunities for wealth preservation and creation will present themselves and how you manage your assets and liabilities will dictate just how much financial success you realize. However, as I mentioned, your assets are only half of the inflation fighting battle so now let’s discuss the other half which is your income. Given that now you’re acutely aware of how inflation works and how punishing it can be on your financial position, I can almost guarantee that you’re going to be more aware of it from this point forward. In fact, one area of your life where it will bother you the most will likely be in your working life.
Number 4: Identifying Income Limitations
You see, for most people, the only way they generate more income is through the raises and promotions they receive at work. Up until this point, you were probably happy to collect your 3% raise every year because let’s face it, you’re not working that hard at your job anyways. So to you, a couple thousand dollars in raises sounds great. However, how much of that raise is really left to enjoy when you factor in your new best friend: inflation. If you get a 3% raise, which if you ask me would be considered a generous raise by today’s standards, and inflation is 2% then you’re really only ahead by a measly 1%. Even if you’re making $100,000 a year that’s just $1,000 extra in your pockets and remember that is before tax!
This is all to say that your new appreciation for inflation is likely going to make you more aware of the limitations of your current income setup and hopefully will prompt you to take action. This is why, if you ask me, one of the best ways to profit from inflation is to use it as a motivator to create new streams of income.
Number 5: Starting A Side Hustle or Business
Any income models where you have little control over its growth are a recipe for disaster like the salary example I just gave. Instead, you should be creating new streams of income both active and passive in nature. I know for me, this wake up call prompted me to build a profitable freelance business and my two YouTube channels and if you are in this same rut then at the very least this should make you question the limitations of how you presently make your money.
If I’m being honest, you can manage your assets and liabilities as best you can but nothing is going to allow you to fight inflation better than simply making more money. Therefore, if you see inflation as a real concern, which you should, then focus most of your attention on creating new streams of income and when you have them up and running I promise inflation will be much less of a concern!