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The hot topic of discussion recently is inflation. As many of you know we are suffering from a surge in inflation. The purpose of this article is to explain what inflation is, what causes it, how it affects each of us, and how to protect yourself against it.
You’ve probably noticed by now when buying groceries adding gas to your car etc. Everything has become more and more expensive.
See the image below that depicts how inflation has increased in just one year!
Right now is the biggest inflation we’ve seen in the United States in the past 30 years and has made many of us overwhelmed.
Things are getting more and more expensive with everyday expenses are getting bigger and bigger!
From the prices of vegetables, fruits, and oil to the prices of cars and housing prices. The rise in everything has affected all aspects of life including our food, clothing, housing, and transportation.
To start off, let us go over what inflation is exactly and what causes it.
Table of Contents
What is Inflation?
Inflation in short refers to the increase in the prices of goods and services. It measures how much the price has risen over time and tracks how the value of the currency falls due to the price increase.
The truth is that inflation is nothing new, it is around us every single day.
It’s just that recently inflation has become crazy. This has made us pay more attention to its presence.
Normally inflation increases about 2.5% every 30 years.
But the “annual inflation rate in the US accelerated to 6.8% in November of 2021, the highest since June of 1982”. – Trading Economics
What Causes Inflation?
There are generally two causes of inflation: the first one is Demand-Pull Inflation, the other one is Cost-Push Inflation.
Let’s walk through each one.
Demand-Pull Inflation
Demand-pull inflation can be caused when the demand for goods increases but the supply stays the same.
When there’s a surge in demand and sellers can’t keep up with the supply, their prices will increase. The result is called demand-pull inflation.
Cost-Push Inflation
Cost-push inflation occurs when the supply of goods is low, but the demand for goods is unchanged. As a result, the prices are pushed up.
For example: when COVID-19 broke out, the global supply chain had major disruptions. Because of the lack supply issues like computer chips, caused the car market became very hot. The lack of lumber caused the cost of building a house to become more expensive.
How inflation affects us?
Our standard of living is mainly based on two factors: your income and expenses.
Inflation will reduce the purchasing power of income while increasing daily expenses, thereby harming the standard of living.
Salaried income will only increase a little each year but expenses will suddenly increase a lot. This creates a major negative impact on life.
Our family’s expenses increased by at least $100 monthly for our cost of living.
I currently own a little Toyota Corolla, and it has awesome gas mileage. The cost to fill up the entire tank used to be $25 but now it’s $45!! My heart reaches out to all the SUV and Truck owners out there, gas has become a major expense!
I am still shocked to see how much it costs me each time to fill up. Also when going to the grocery store we can tell the price of food and many other items have increased a lot.
How to Protect Ourselves from Inflation?
Here are three ways that can help you be protected from inflation.
- Budget and Save
- Invest in the Stock Market
- Invest in Real Estate (Even Your Own Home)
1. Budget and Save
No matter what it is important to budget and save money, making sure to not spend money where it doesn’t need to be spent.
Figure out how much money you need for essentials like rent, food, and transportation.
Next, figure out how much you can afford to spend on non-essentials like entertainment and dining out.
When you know how much money you have to work with, it’s easier to stick to your budget.
Below are two useful tips we’ve used to help save 56% of our income.
Tip #1 Mint Mobile – Incredibly Priced Phone Plan
Phone plans can get super pricy with long, frustrating contracts. We made the switch to Mint Mobile and have been super happy for many reasons.
They have very affordable plans starting as low as only $15 a month!
My wife and I only pay $15 each for our phone plans each month. Their service has been very reliable as well which is a huge plus.
To see these incredible deals, click HERE.
Tip #2 Cancel Unnecessary Subscriptions
Subscriptions can really add up and are sneaky with their auto-renewals.
We’ve learned it’s important to control the urge to buy lots of subscriptions.
Right now our only subscription is with Amazon Prime. Well.. actually that and my Xbox live account. haha
When you know how to budget your life well, then you can save more money to invest.
Tip #3 Use Alternatives
Just because you’re trying to save money doesn’t mean you have to give up your hobbies or entertainment.
There are always cheaper alternatives!
Instead of going out to the movies, rent a movie from Redbox.
Or, instead of going out to eat, cook at home.
There are plenty of ways to have fun without spending a lot of money.
2. Invest in the Stock Market
Holding stocks may be a good way to fight inflation. When companies sell their products at rising prices, this will lead to increased revenue and earnings, which inevitably lead to a rise in stock prices.
When it comes to funds, we love the Total Stock Market Fund and S&P 500. If you don’t know what to invest in, they both can be a good starting point!
When you invest your money wisely, you can earn interest and dividends! It is an amazing tool against inflation.
We love how interest and dividends are passive income – you can earn it while sleeping!
A great way to start investing is by putting money into some tax advantage accounts such as an HSA or an IRA. Tax-advantaged accounts can save you a lot of money in tax!
M1 Finance is a great place to get started with their super easy-to-use app. There are NO commission and account management fees.
It is not just a trading stock brokerage account but also offers an IRA option that allows you to invest in your retirement.
We highly recommend using M1 Finance if you would like to open a brokerage account or a retirement account! For more details on how you can start investing with M1 Finance click HERE.
3. Invest in Real Estate (Even Your Own Home)
Real estate can be another great tool to fight inflation, and you’ve probably noticed how housing prices have risen over time – just ask a grandparent or parent how much they purchased their house for.
Indeed, the real estate bubble is usually accompanied by a correction period. For example, the housing crash in 2008. Nevertheless, on average, house prices tend to rise over time which offsets the effects of inflation.
Our real estate journey started when we purchased our first real estate property as college students at ages 21 and 23. We only started with $20,000 but it has since grown to $250,000 in 4 years’ time.
We later became first-time landlords at ages 22 and 24.
In total, we have purchased three properties but sold our first one in order to graduate student debt-free.
Inflation can be a difficult thing but keeping expenses low and investing wisely will go a long way to protect you.
Drop a comment below and let us know what you think! We’d also love to hear your stories related to inflation.
