Inflation has arrived, and it doesn’t appear to be going away anytime soon. Consumers are experiencing higher prices on food, gasoline, rent, and many other everyday goods and services. Many families are modifying their investment strategy by allocating capital to real assets like apartment buildings or to hard currencies like gold and bitcoin.
Setting aside investment strategies for a moment, is there anything you can do to combat inflation as a consumer? In fact, there’s plenty that you can do.
As inflation changes, so do people’s time preferences for their money. If you expect inflation to be lower in the future, you are more likely to delay gratification by saving and investing your money for the future. Conversely, if you expect inflation to increase, you are probably more inclined to spend your money today, perhaps because you fear that your money may buy less in the future. As such, it may be well worth considering making some common-sense changes to your personal financial planning approach, ranging from the way you finance your home to the kind of automobile you purchase to the way that you buy your food.
Now, if you think inflation will not stay high and will fall back down to the 1% to 2% range, it probably does not make sense to make any changes. However, suppose you are concerned that price increases will stay above 3% on average and that real (inflation-adjusted) interest rates will remain negative. In that case, you may want to reconsider some of your financial planning decisions, while making sure that they reflect your individual financial situation and personal tolerance for risk.
1. Buy Rather Than Rent
In an inflationary period, the rent vs. buy decision generally favors buying over renting your home. When you are a renter, your landlord will likely hike your rent at the level of inflation when your lease comes due each year, which might be fine when inflation is low, but it is much less desirable when inflation is high. As a renter, your housing costs are unprotected from inflation. In contrast, there are two strong reasons to buy your home. First, as a homeowner, your mortgage payments are generally fixed. Second, the replacement value of your home is likely to increase with inflation because the cost of land, materials, and labor are all rising with inflation. Being a homeowner helps to protect you from inflation.
2. Finance Your Home With A Mortgage
It’s a terrible time to be a lender or a bond investor, as interest rates are not even high enough to compensate investors for inflation. However, it’s an ideal time to be a borrower, assuming that you don’t take on more leverage than you can handle. If you get a fixed mortgage that is as long-term as you can stomach, you are making inflation work for you. Some homeowners are borrowing money for 30 years and paying less than 3% per year, and that is before taking into consideration the tax deduction on interest expenses. However, the very best thing about a mortgage is that the inflation-adjusted value of your mortgage payments declines at the same rate as inflation rises.
3. Get An Auto Loan
Interest rates on auto loans are also incredibly low right now. If you expect inflation to remain high, it makes sense to finance your car purchase for the same reasons it makes sense to finance a home purchase. Just make sure to seek out fixed-rate loans extended as far as possible. If you can get an interest rate below 3% and borrow responsibly, you’ll end up paying off your debt in the future with cheaper dollars.
4. Improve Your Energy Efficiency
If you own a car that uses a lot of gasoline, you should get ready psychologically and financially for higher prices at the gas pump in the future. You might want to think about reducing your future gasoline bills by purchasing a car that is more fuel-efficient or, even better, runs on electricity. At home, you could consider installing solar panels to reduce your future electricity bills. To reduce your heating and cooling costs, you have many levers to pull, such as sealing your windows and doors. Energy efficiency projects are more likely to generate a strong return on investment during inflationary environments where energy costs are rising quickly.
5. Prepare For Shortages
Shortages are quite common in high inflation environments. For that reason, you may want to consider creating and maintaining an emergency supply of non-perishable food and other essentials for periods when stores cannot resupply themselves. Yes, this includes buying surplus toilet paper, but it also means stocking up on canned goods and other non-perishable items that you can find on sale. Fortunately, with prices rising quickly, buying emergency supplies can represent a high interest rate savings vehicle: the likelihood is that the prices of goods will increase at a much faster rate than the interest rate on your checking account.
6. Buy Long-lasting, Durable Products
When you are looking to purchase a durable good, such as a washer and dryer, buy a quality product that will not likely need to be replaced or serviced anytime soon. Although your purchase price might be higher, the investment could keep your expenditures over the period of your ownership more manageable.
7. Follow A Budget
Put together a budget and focus especially on the expense categories that inflation might affect in the future such as transportation, food, utilities, education, and healthcare. Think about ways to stretch your budget further, such as shopping at less expensive stores or bulk stores like Costco. Also, consider expenses that you can cut or reduce without affecting your quality of life.
While we as consumers may dread inflation, it is possible to prepare for it. If you believe that inflation is going to increase, you can help mitigate its effects by making big purchases now, taking on reasonable amounts of debt at low interest rates if possible, and preparing your home and your family for cost increases. You can’t control how inflation rises and falls, but you can control your own financial decisions and make choices today that will help you manage inflation tomorrow.
Disclosure: This article is for informational purposes only and is not a recommendation of a particular strategy. The views are those of Adam Strauss as of the date of publication and are subject to change and to the disclaimer of Pekin Hardy Strauss Wealth Management. Follow me on LinkedIn. Check out my firm’s website or follow us on Twitter.