Inflation is pretty much all anyone is talking about. At least in my household! It manages to crop up at (nearly) every dinner convo so much so that my mum is wishing inflation would disappear – to shut us all up! More like me. But jokes aside, I promise you that Inflation really is my least favourite subject right now. I can’t bear to hear another word of it. Because the longer it drags on the poorer we’re getting.
Inflation gets me really annoyed. For so many reasons. Least of all because it could’ve been managed better (or managed at all!) or at least somewhat foreseen by the people (ahem, the Fed) whose jobs and sole responsibility it is so ensure price stability but instead they crushed our purchasing power all to keep their greed machine pumping. They let rock-bottom rates and entire oceans of liquidity flow into every nook and cranny. Markets (both stocks and bonds) were given a lifeline. More like a trillion. Or three. Trillion.
For want of an example of just how much money was sloshing around, look at how many companies went public during the pandemic and then look how high their shares flew. Then look to the crypto space. Look at NFTs (like the rise and fall of Jack Dorsey’s tweet) to see the froth exploding. And if you’re unconvinced, cast your mind back to the AMC/GameStop hullaballoo. TOO MUCH MONEY! People were handed $1,200 checks and what do you think they did with that? They blew it on the casino called the stock market. If you’re curious, read here all about the drama and the long-lasting lessons that are in it for us.
This clown show made a lot of people a lot of money (great) but it’s now losing a lot of people a lot of money (not great). Poor pensioners, they’ve had ~$3trn of wealth wiped out from this bear market. Just as much money as the Fed printed. Now isn’t that ironic!
Why else does inflation really bother me so?
Because it’s a cruel kind of tax that’s disguised as something totally different. And not only is it a tax on what you earn since each £1 will lose ~10p in purchasing power each year, but it’s also a tax that takes from the poor (those who don’t own assets) and gives to the rich (the asset owners).
Since with inflation, things like houses, watches, cars and all sorts of other assets go up. While our stocks seem to be doing the exact opposite(!) at least you’ve got the comfort in knowing that your other assets are collecting returns and not just dust.
But be it as it may, even if you are reading this blog right now and have oodles of cash and piles of assets (hurrah!), I bet you’re still being affected. The chat that rich people are totally immune to inflation is total nonsense. Rich people (not super-rich, just rich) don’t have bottomless pits of money.
Their earnings, just like the rest of us, end up buying them less and less each year. Sure, I bet they have several different income streams but they’ve still gotta find a way to make their money stretch farther or make more. Or both. This is the same dilemma we’ve all got. Earn more spend more or earn less spend less. It’s that simple.
So, to take away some of the craziness, here are some tips on how to not only cope with inflation but to hopefully come out the other side more financially resilient – and wealthier!
#1 Find ways to make more money (psst: ask for that pay rise!)
Inflation is this nasty tax and like all taxes, they only do one thing: shrink your income! So the best way to at least try and combat this is by upping your income. You have several options. You could ask your boss for a salary rise. This is one we mostly shy away from though I’ve not started working yet so I guess I’m not one to talk! But my guess is we don’t like asking for things that will challenge the status quo. And asking for a salary raise is just that.
But you have loads of ammo on your side. For starters, inflation is averaging ~10% so you’ll need to earn 10% more just to keep up with your expenses. Then, you demonstrate your worth. Here use concrete evidence to back it up. Like what % revenue you helped generate or by how much you cut process time. Bosses (so I’ve been told!) love it when you make their lives easier. So show them you’re doing just that. And with these labor shortages, trust me, the last thing they wanna do is let you go. So a 10% pay rise might be a price worth paying. For them anyway!
We were talking about inflation so let’s get back to it! Another way to increase your income is to look for other sources of income. You earn from your employer, but could also earn from dividends and side hustles.
Looking to invest into companies/funds that pay a dividend can be handy. They can supplement your salary and offer ways of portfolio diversification and resilience during these strange and tough times.
Top tip: Be sure that you’re diversifying your dividend heroes and aren’t investing in, say, housebuilders only. This is bad news since if one or two householders in the industry start to cut dividends (as hard times come by), others may very well follow and you could be sitting on falling incomes across the board. No good. Instead, invest in loads of industries from mining to energy to healthcare and so on. So if one leaves you hanging, you’ve got loads others to hang onto. Dividends were the things no one wanted this past decade. Something tells me it’s now all anyone wants. Life is a funny thing indeed.
Okay, so you’ve asked for that pay rise and you’ve invested for those dividends. What else? Well, you can always start your very own side hustle. The word ‘side hustle’ is way too glamorous for its own good that it often puts people off or sets them unrealistically high expectations. It need not be something crazy, just another income stream. It can be anything from tutoring to freelancing to selling stuff on Amazon. Whatever it is, be committed. Nothing worthwhile ever happened overnight so keep at it.
#2 See what you can cut back on
We all spend too much on something. You might not know what that something (or somethings!) is but it’s there. So, before you even begin thinking about cutting back on your expenses you’ve gotta know what it is you’re spending on. Start by tracking your expenses for one month. Write it all down. Anytime you make a transaction whether it’s for your new shoes or your groceries, get it down. Then, come the end of the month you can analyse what you’re spending on and what % of your monthly income goes toward your stuff.
This should hopefully make it crystal clear where it is you’re over-spending and you can sort it right out. Of course, this stuff is easier said than done but don’t make the mistake in thinking that small amounts don’t add up. ’cause they do. And it works both ways. It’s much easier to cut back when you can, not when you have to – read here why you should get into that habit.
#3 Get your portfolio inflation-ready
You’ve got to make sure that your portfolio can handle this new inflationary world. This means not only investing in that growth stuff (which I suspect many have fled from anyway) but in the income stuff too – aka those dividend stocks I mentioned in #1.
But beyond dividends, there are other ways in which you can prepare your portfolio and that is by investing in companies that have the purchasing power (aka inflation’s antidote). Companies that are able to pass on increased costs to us – their consumers – will come out stronger. Luxury goods are a prime example of this! A Gucci handbag that costs $1,200 or $1,500 – you think $300 will hold the buyer back? If they’re already willing to splash out $1,200 then what’s a little more, hey?
You could also turn to the very things that are causing inflation! ENERGY! Then there’s mining – the prices of which (especially copper) have come down quite a bit as we sound the recession bells (though read here what you can do to recession-proof your portfolio) but they’re scarce in nature and we need them so prices will keep on rising as we head to net-zero (btw EVs take in 4x the amount of copper as their non-EVs!) and since not much capital has been allocated to these areas, we could be in for a real shock.
Real estate has also traditionally acted as an inflationary hedge: when inflation rises, rent tends to rise with it along with the value of the property. Read here how you invest in it and why every portfolio needs a bit of real.
So, readers, there you have it. Some of my thoughts on this!
I’m curious to hear your views on inflation and what you’re doing to protect yourself from it to avoid going crazy!
Stay sane, y’all.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 