Do you remember the early 2000s when a $20 bill could feed your entire family at McDonald’s? Fast forward to today, and that same meal costs between $35 and $40. A decade ago, gas was $1.88 per gallon; now it’s $3.36—a 78% jump in just ten years. According to the U.S. Bureau of Labor Statistics, prices for goods and services have risen by about 66% in the past decade.
So, what does this mean for you? To maintain your current standard of living, your income needs to rise by at least at the rate of inflation each year. If you’re planning to grow your family or improve your lifestyle, you might need to aim for a 15-20% yearly increase in income, especially if you want to retire comfortably.
You can’t control the economic forces that raise the cost of living. You also can’t work more hours than there are in a day. However, you can protect yourself from inflation.
In this article, we’ll show you how you can protect yourself from inflation with strategic investing without compromising your quality of life.
What Is Inflation and How Can You Beat It?
Inflation is the general rise in prices, caused by the devaluation of the dollar over time.
In other words, the dollar in your pocket today will buy fewer goods and services as time goes on. For example, if inflation stays at 5%, a dollar will only buy 95 cents worth of goods at today’s prices a year from now. And by 2034, that same dollar will buy half of what it can today. This is why people who rely solely on cash or wages for their income tend to lose purchasing power over time.
However, if you invest in an appreciating asset, inflation can work in your favor. Let’s say you buy an asset for $100 today. If one assumes an inflation rate of 5% per annum, and your asset appreciates in line with inflation, it could be worth $163 in 10 years. Those who invest in appreciating assets protect themselves from inflation and build lasting wealth.
Now, let’s explore three common strategies you can use to protect yourself from inflation:
Savings: Principal Erosion
If you received an allowance as a kid, the first piece of financial advice you were likely to hear is “save your money.” While having cash reserves is crucial to your financial wellbeing, simply saving money in a bank account can erode your wealth over time due to inflation.
Here’s how: Imagine you receive an inheritance of $200,000. Right now, a cup of coffee costs $1, so you could buy 200,000 cups of coffee. Instead, you deposit the $200,000 into a standard savings account with a 4% annual interest rate.
Fast forward to 2034. You expect your account balance to be $296,048 assuming 4% interest compounded annually for 10 years. That’s a profit of $96,048 over the course of the investment.
However, if inflation remains at a constant 5% over the ten years your money is in the bank, the price of coffee will increase to $1,63 per cup by 2034. Keep in mind that you could have bought 200,000 cups of coffee with your inheritance when you received it. However, ten years later that same $200,000 will only buy you 122,700 cups.
If you withdraw your funds in 2034, your $296,048 will buy you 181,624 cups of coffee. That’s less than the original 200,000 cups you could have bought the day you put your money in the bank. The interest you received on your $200,000 deposit was less than the rate of inflation and, as a result, you lost 9% of your purchasing power.
Assets: A Hedge Against Inflation
Investing in appreciating assets is a proven way to protect your money from the negative effects of inflation. While cash loses value over time, the right assets tend to grow in value, keeping pace with or even outpacing inflation.
Let’s revisit the earlier example. Instead of putting your $200,000 inheritance in a savings account, you decide to invest it in an appreciating asset, such as a rental property.
The deal breaks down as follows:
| Purchase price: | $200,000 |
| Monthly rent: | $1,900 |
| Monthly expenses: | $650 |
| Appreciation rate: | 6% |
| Inflation Rate: | 5% |
When you buy the property in 2024, it’s market value is $200,000. So, you can either buy the property or 200,000 cups of coffee.
If the property accrues in value by 6% every year, you could sell the property for $358,170 in 2034. That will provide a profit of $158,170 on the sale. In addition, you will receive $1,900 in rent every month, and after paying your monthly expenses of $650, you will have an additional $150,00 over ten years (before tax). In 2034, you will have $508,170, which will buy you 311,760 cups of coffee. That’s a 55% increase in purchasing power.
Leverage: Turning Debt Into Wealth
One of the smartest ways to protect yourself from inflation is to shift its negative effects onto someone else. In the first example, when you deposited money into a savings account, the bank passed the negative effects of inflation onto you, and you ended up on the losing side of the deal.
Here’s a closer look at what really happens: You deposit $200,000 into a savings account, and the bank offers you 4% interest per year. Essentially, the bank is borrowing $200,000 from you and paying 4% interest in return.
But what does the bank do with your money? They immediately use your $200,000 as working capital fund deals that offer high returns. Over the 10-year period, while your $200,000 loses purchasing power due to inflation, the bank uses your cash to fund deals that offer higher returns that are higher than the 4% interest they are paying you and the inflation rate.
In this scenario, you’re on the paying side of inflation, while the bank is on the receiving side.
“There’s a misconception that banks profit primarily from debt. While it’s a significant revenue stream, their biggest gains come from consistently positioning themselves on the receiving side of inflation, and you can too.” – George Antone
How Do You Get onto The Receiving Side of Inflation?
The above scenarios clearly demonstrate that the financial system is designed to work against you. However, if you learn how to play the game of finance, using the same strategies as the banks, you can put yourself on the receiving side of inflation and build significant wealth.
Let’s go back to your $200,000 inheritance and think like a banker.
You have $200,000 in capital, which means that you could buy the above-mentioned rental property using all of your cash. However, you decide that you would rather keep most of your cash and approach the bank for a mortgage to fund the deal.
The bank offers you the following terms:
| Down payment: | $40,000 |
| Loan principle: | $160,000 |
| Loan term: | 30 years |
| Loan interest rate: | 4.5% |
In this situation, you have used 20% of your available capital to purchase an asset worth R200,000 at current market prices. You could buy 40,000 cups of coffee today with that money. You use the $1,900 in rental income you receive to pay your monthly mortgage and maintenance costs on the property while retaining $160,000 in capital to purchase more assets in the same way.
Ten years later, the first property you bought has appreciated to $358,170. If you sell the property and pay off your mortgage of $248,475, you will be left with $109,696 in profit (before tax). In 2024, you could have bought 40,000 cups of coffee with the capital you used as a down payment. In 2034, you could buy 67,297 cups of coffee with the money you made on your property sale. That’s a 68% increase in purchasing power.
In 2024, the bank could have bought 160,000 cups of coffee with the money they loaned you. In 2034, the bank can buy 152,438 cups of coffee with the money you have paid them back ten years later. That’s a 5% decrease in purchasing power for the bank.
When you use debt as leverage to acquire appreciating assets, you pass the negative effects of inflation onto the lender. In addition, you retain your capital to scale your asset acquisition to build meaningful wealth over a much shorter period.
Let’s Review:
| STRATEGY | INVESTMENT VEHICLE | CAPITAL INVESTED IN 2024 | PROFIT BEFORE TAX BY 2034 | PURCHASING POWER |
|---|---|---|---|---|
| Traditional savings | Savings Account | $200,000 | $96,048 | -9% |
| Assets | Real Estate (All Cash) | $200,000 | $508,170 | 55% |
| Leverage | Real Estate With Mortgage | $40,000 | $109,696 (x5 if scaled) | 68% (x5 if scaled) |
How To Move from Theory into Practice
If you received a $200,000 inheritance today, would you know how to invest it in a way that not only beats inflation but also helps you take a major step toward achieving your ultimate financial goals?
While walking into a bank and depositing your windfall is the easiest and quickest option, it’s also the surest way to lose purchasing power over time. It may be considered “responsible,” but inflation will slowly erode the value of your savings. When you take banking fees into account, you are actually better off stuffing the cash under your mattress!
Hedging with appreciating assets is a more effective strategy for preserving purchasing power, especially in times of high inflation. However, it can be capital-intensive and has limited scalability.
Using debt strategically is one of the most efficient and powerful ways to protect yourself from inflation and build meaningful wealth. However, it requires a high level of expertise to identify the right assets, structure financing, and scale effectively to meet your goals. You also need to manage you debt to asset ratio and adjust your strategy as market conditions change to mitigate risk. For individual investors, this can be an overwhelming process.
That’s where Fynanc comes in. We specialize in teaching you the strategies and building the tech-driven systems that make these complex processes accessible to any investor, no matter where you are on your financial journey.
Discover how you can protect yourself from inflation by getting on the receiving side of inflation — starting today.
