How to Combat Inflation Throughout Life

The Power of Compounding

What is inflation?

To understand how to combat inflation and why we need to fight inflation we first need to understand what inflation is.

The dictionary definition of inflation is “a general increase in prices and fall in the purchasing value of money.”

This means that the more inflation we have the less value each dollar has or the less purchasing power each dollar has.

Inflation is caused by a couple of different things but the main reason we have inflation is because the government is printing more money.

Inflation is measured as a percentage. For example, a 3% inflation rate means that your dollar is worth 3% less than it was the year before. The government aims for a 2% inflation rate but rarely ever achieves that goal.

A small amount of inflation is considered healthy for an economy but too much inflation can cause a depression or even the collapse of a country.

Inflation also compounds so money sitting in a savings account decreases in value quicker and quicker as time goes on. This is why it is important to know how to defend your money against inflation.

Assuming we have an average inflation rate of 3% wich is normal. If you put $1,000 under a matress and let it sit for 10 years it would now take over $1,300 to buy what that original $1,000 would have bought 10 years ago.

How to defend against inflation

If you read our newsletter from last week you might remember how we talked about assets vs liabilities. This is key to beating inflation.

When we experience inflation everything increases in price. Though some things increase in price faster than inflation. These are assets. Assets increase in price because there is a limited supply or because they produce more money.

When we experience high inflation assets like land, gold, and oil often also increase in price because they are limited, unlike money.

In order to make sure you are properly buying assets that defend against inflation you want to make sure they increase in price at a higher rate than inflation.

Cash is important to pay for emergencies but having too much cash sitting in a bank account paying low interest is a sure way to lose buying power. This is why so many Americans are struggling right now.

Because inflation has been extra high for a while, getting up to 8% many people lost a lot of their savings without even realizing that their savings were actually losing!

That is why you need to buy assets, so that while everybody else is panicking because their savings are now worth half as much, you now have twice as much value.

This is why you might hear financial experts say the saying “savers are losers” because saving money is a easy way to lose money.

It does not take very much time to open a brokerage account or even a high yield savings account to hedge against inflation. Pick liquid assets that steadily go up in value faster than the rate of inflation in order to protect your money against inflation.

The power of compounding

We just talked about how inflation can eat away at your savings and how the power of compounding can speed that process up leaving you with a fraction of the value after many years.

But what if you could use the power of compounding to your advantage?

If you invested $1,000 right now and got an average return of just 7% you would have over $16,300 in 40 years. That is with a very average rate and a small amount of money!

Imagine if you put $10,000 or if you got a much higher return. If you contributed $200 a month for 40 years you could have over half a million dollars at a 7% interest rate.

All it takes is a couple hundred dollars a month, if you wanted to be a millionare in 40 years you would need to contribute $400 a month, but if you waited even just 5 years you would only have $725k.

The best time to start investing is yesterday but the second best time to start is today. The sooner you start investing the more compounding can effect your returns.

If you want to see how much power compounding can have on your life, check out this site Compounding calculator.

I highly encourage you to check out the calculator to see how big of an impact compound interest can have on your money and your life. I also encourage you to start investing as soon as you can because even just a few hundred dollars a month can make a huge impact if you start early.

Start investing today

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