Published on: 16 August, 2022
Updated: 30 December, 2022
With the US consumer price index (CPI) touting a 9.1% increase in the cost of living in the year ending in June 2022, Americans and small business owners are looking to fill their inflation-fighting toolkit for the long haul. But what does that look like? 🤔
To us, it looks like helping your money maintain its buying power even while prices soar. And it looks like putting financial puzzle pieces together to protect yourself in the upcoming months or years of cringeworthy inflation rates. 😱
What we’ll cover in this piece:
- Why and how to preserve your purchasing power
- and negotiating savings
- Investment strategies for individuals to protect themselves from inflation
- Inflation-proofing your small business
Preserving your purchasing power from inflation’s bite
As inflation rises, it makes the cost of living more expensive. In response, every dollar you have in cash loses value relative to the world around it. When inflation rises, it can happen fast, so it’s crucial to preserve your purchasing power during inflationary times.
Planning ahead for inflation looks different for everyone: individuals, small businesses, and other entities each have unique ways to combat rising prices (we’ll dig into that more below 👇🏾).
Whatever category you’re in, consider the Rule of 72:
The Rule of 72 is a formula typically reserved for timing investment gains. For example, if you’re invested in the stock market and have money in an index fund gaining about 6% annually, you can divide 72 by 6 (your annual gain percentage) to get 12, which is the number of years it would take for your investment to double.
However, the Rule of 72 formula also works in reverse when timing how long it takes your money to lose value due to inflation. For example, if inflation is rising 9.1% annually, you can divide 72 by 9.1 to get 7.9, which is the number of years it would take for your money to halve in value. 🤯
The rate of inflation fluctuates month to month, but to make somewhat accurate calculations you can take the average of the last few years to determine how quickly your money has been losing value. For those of us who prefer to avoid mental math, SmartAsset has an excellent inflation calculator to model this without breaking your brain.
Knowing the damaging effects of inflation can help you protect yourself from it. Just this simple bit of knowledge will have you well on your way to building a great inflation protection game plan! 🏁
Consolidate debt and negotiate interest rates to protect yourself from inflation
From credit cards to mortgages or any loans in between, consolidating your debt and ensuring fair interest rates can help you keep inflation at arm’s reach. When dealing with loans, this is true for both lenders and borrowers.
On the borrower side, inflation can actually be good for you. This is because the money you’re paying back is worth less than the money you borrowed to pay for something.
This concept is called “inflation-induced debt destruction.” Hear Jason Hartman explain it here:
Even with the benefits for borrowers, consolidating debt where you can may still be a good idea.
If you have different forms of debt—like a mortgage vs. a personal loan—see if refinancing either loan would decrease your interest rate. With interest rates rapidly rising, this may prove difficult. If you can’t decrease the interest you are paying, preserve your remaining capital while paying down your balance as much as possible during times of high inflation.
On the lending side, any new loans you make—on Pigeon or elsewhere—should use interest rates that are a) fair to borrowers and b) adequately compensate you for rising costs.
Smart tip💡: Making a loan with someone you trust, and want to agree on a fair interest rate for you both? Here’s how much interest you might want to charge. While money can often bring awkwardness to relationships, having a clear in place with the right parameters can create a fantastic situation for both parties. Pigeon makes it easy to borrow from or lend to people you know with automatic reminders, payment tracking, and the necessary legal documents to protect both sides.
Inflation-proofing your investments as an individual
Now let’s dig into what protecting yourself from inflation looks like for individuals and small-to-medium-sized businesses (SMBs):
Ellevest founder and CEO Sallie Krawcheck once said: “By keeping your money in the bank you're actually going backward on an inflation-adjusted basis.” 🏦
If you shouldn’t store more cash than you need access to during an inflation surge, what can you do? Firstly, do your due diligence and speak to a fiduciary financial advisor before taking any investment advice.
Consider these wealth management options as an inflation hedge:
- High-yield savings accounts will help you preserve some capital, but you’ll still lose money to inflation. These accounts are great for increased liquidity (quick access to cash) and could be good for emergency funds.
- Treasury inflation-protected securities (TIPS, aka I-bonds) are a popular option for some investors seeking an inflation hedge. They come straight from the US Treasury. According to TreasuryDirect, “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the [CPI]. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.” You can hold until five-year maturity or sell ahead of time, though there is an early redemption penalty (three months of interest).
- Exchange-traded funds (ETFs) can be a good option but are riskier when stock prices are falling long-term investments in a diversified portfolio may benefit from strategic ETFs.
- Real estate investment trusts (REITs) or physical real estate tend to fare better in inflationary environments. Bear in mind that even if current housing markets are abnormally inflated they could contract despite higher inflation.
- Commodities include gold and other precious metals, wheat, cotton, and other raw materials. They are historically seen as inflation hedges since they are inherently valuable to human civilization. Always consider geopolitical circumstances as these impact the commodities markets. For example, Russia typically accounts for 18% of the world’s wheat exports (with Ukraine’s wheat experts not far behind), so sanctions and port closures during Russia’s war in Ukraine have negatively impacted the commodity. 🌾 Remember: Commodities and commodity futures are best used as a risk management strategy for those with thorough knowledge about the complex asset class.
Certain investments are riskier during inflationary times:
Fixed-income securities like some bonds and certificates of deposits (CDs) struggle with high-interest rates that often accompany inflation. Stocks and some mutual funds may be more prone to volatility (or at least less likely to return high enough rates to combat inflation), though it depends on how well hedged the company or fund is.
Inflation-proofing your small-to-medium-sized business
Amid rising inflation, SMBs want to do what they can to gain as much inflation protection as possible. 👨🏽💻 Some good news: Finding success in a difficult economy can solidify your business for the long haul.
- Diversify your offerings and get used to adapting. The Federal Reserve (aka the Fed or central bank) tries to slow the economy to combat inflation, which can mean an incoming recession - which you should prepare for. Experimenting with offering new products or services can help you find new streams of revenue, ideally recurring. Additionally, promoting educational opportunities for your employees can ensure you’re ready to pivot to new business models when needed.
- Prioritize cash flow. Businesses can operate without profit for a while but could run into the ground without positive cash flow. Figure out and prioritize your 90-day cash flow while you keep the rest of your metrics in the back of your mind.
- Downsize to cut costs. Use your money wisely and trim expenses where you can. This isn’t always possible, but it can help your cash flow stretch further.
Smart Tip 💡: Having a business bank account for your business to receive funding (i.e. instead of just using your personal checking or savings account) can be a huge help when trying to secure financing. Many low-cost options for entrepreneurs such as Lili's $0 Minimum Deposit Business Bank Account also come with built-in tools to make running your business easier, like Invoicing Software and Write-Off Trackers."
Bottom line: Start protecting yourself from inflation now
Both businesses and individuals should take steps to avoid losing money during periods of high inflation. When everything gets more expensive, you can protect yourself by keeping a secure investment portfolio, exploring diversification options, and balancing expenses and earnings for a smoother ride through what could be a rocky downturn. 🐣
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