How to Profit from Inflation

How to Profit from Inflation

Are you worried about inflation and the state of the economy, and how it will affect you? You’re not alone. Many Americans are concerned about inflation and how they will be able to afford basic necessities. Fortunately, you can do a few things to profit from inflation and make the most of an economic crisis.

The Current State of the Economy

I’m sure you’re all aware that the current state of the economy is not looking good. According to financial experts, the U.S. is heading toward a recession, due to record inflation and climbing gas prices. Since the beginning of 2021, inflation and gas prices have been steadily rising, with a more rapid increase in the past few months.

How Inflation is Affecting Us

Currently, the inflation rate sits at 8.6%, marking a 40-year high. Rent, groceries, gas, energy, used vehicle prices, and consumer goods are at an all-time high, forcing millions of Americans to search for supplemental income. Unfortunately, inflation is rising so rapidly that Americans are struggling to pay for their basic needs, let alone save for retirement.

To combat rising prices, the Federal Reserve has raised interest rates, which drives down consumer demand. Unfortunately, higher interest rates make it more difficult for consumers to get a loan on a car or a house, causing economic growth to decline.

Why the Rich Love Inflation

Unlike most Americans, wealthy people love inflation because their assets go up in price, generating more profit. For example, most rich people invest in assets like real estate. Rich people tie their debt to cash-flowing assets like real estate, outsourcing their debt as rent to tenants. As real estate goes up, rent goes up, allowing rich people to make a profit. 

Another reason the rich love inflation is because their debt decreases due to the reduced value of the dollar. For example, in 30 years, a million dollars in debt will be reduced to $308,000 at a 4% inflation rate.

Lastly, the rich love inflation because their investments go up. For example, most rich people invest in long-term investments, which grow during periods of inflation. Even if the value of the dollar decreases, their investments increase due to compound interest.

How to Profit from Inflation

Real Estate

The rich may know how to benefit from inflation, but that doesn’t mean you can’t too! For example, purchasing real estate is always a good investment, no matter what market we’re in. The reason is that real estate almost always appreciates in value, giving you consistent cash flow that increases as inflation increases. Also, when you rent out your properties to tenants, the rent goes up during inflation, resulting in extra cash flow.

Long-Term Investments

You can also profit from inflation by investing in long-term stock market investments, such as index funds. Index funds are investment funds that give you ownership of many different stocks, diversifying your portfolio. In addition, index funds are low-risk because you don’t own the entire stock, only a portion of it. So, when the market goes down, you will only lose a small amount of money. On the flip side, you make a profit when the market goes up. During periods of inflation, companies with higher pricing power raise their prices to match inflation, resulting in greater profits. So, by owning a portion of that stock, you will also make a small profit.

Inflation Liabilities You Need to Get Rid Of

Cash

According to big-time investors like Warren Buffet and Ray Dalio, cash is a liability during inflation because the value of the dollar goes down. In addition, your rate of return for cash is essentially $0 because you aren’t making any money from holding it. So, if you have extra cash lying around, invest it in long-term investments like index funds.

Savings

Another inflation liability is your savings account. If you leave your money in savings, the value of the dollar decreases with inflation, so your money won’t be worth as much later on. I advise keeping six months’ worth of savings in your account and investing the rest to allow it to grow with compounding interest.

Fixed Interest Rate Bonds (Government Bonds)

The next inflation liability is fixed interest rate bonds (government bonds). Fixed interest rate bonds are technically considered “safe” investments. However, these bonds are negatively affected by inflation. A 10-year government bond has a yield of 1.8%. For example, suppose the average inflation rate is 4% for the next ten years. In that case, you’d receive a negative rate of return of around -2.2%. So, people that own these types of bonds usually lose money during inflation, unlike borrowers with long-term fixed-rate assets.

Final Thoughts

Inflation can be difficult and scary for those who don’t know how to use it to their advantage. So, I recommend you take this advice and study other wealthy people, following their strategies to learn how to make the most out of a negative situation. Knowledge is power, especially during periods of economic downturn. So, when everyone else is panicking, you can use your financial knowledge to make your money work for you.

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