What is inflation?
Inflation refers to increase of prices of goods over a period of time.
More money is required to purchase same amount of goods next year as compared to this year.
The quality or quantity of goods is not increasing but the value of the money is eroding with time that is the reason why one needs to spend more money to get the same stuff as time passes.
In an ideal world where there is no inflation money would have worked as a perfect store of wealth transferring value from present to future.
However sadly that is not the case, value of money is losing as the day passes.
Hence, one must look for other means to store wealth.
Rules of game are being changed
The world is not a fair place one should not have to take excessive risks just to save the purchasing power of money he earned through hard work and ingenuity in the first place.
A doctor should spend his time perfecting his craft, rather than trying to figure out the complex financial investing world to protect the value he received from serving patients.
As a result, his practice suffers because he is not able to give his 100% time and attention to his craft.
Neither is he able to devote sufficient time to managing his wealth. As a result, he gets tricked by scammers or loose money in risky investments.
It is unfair, but that is the world we live in.
The Governments and banks are actively trying to steal wealth from you in form of inflation. Hence even if it is unfair you will have to learn how they are doing it to protect yourself from theft.
How to protecct yourself from inflation
Loss of purchasing power of money is only a first-order consequence of inflation. Excessive inflation impoverishes population which results in violence, draconian government rules to counter the violence, and total collapse of societal structure.
Inflation in most countries is not so high to break basic functioning of civilization. However, do not think that hyperinflation cannot happen in your country only because it has not happened in the recent past.
Important steps that you can take to protect yourself from inflation are as follows:
Step 1 -Educate yourself
Government-issued fiat is gradually losing its value over a period of time. Hence one needs to find other sources of storing wealth that can transport present wealth to the future.
Best investment
The best investment one can make is
- Health – Gym membership, diet, hiring trainers etc
- Gaining experiences – Traveling places, trying out new stuff etc
- Maintaining relations you value – Spending time, helping financially etc
- Honing your craft – Educating yourself, buying tools etc
Â
These intangible gains:
- Give highest returns
- Have little to no risk associated
- Compound over time
- Cannot be taxed
Second best investment
The second best investment that you can make is growing your business (I recommend everyone to have an online business). Bet on yourself.
Third best investment
The third best investment are hard assets like real estate, equity, precious metals, collectibles, commodities, crypto etc. Each of them is a different asset class and requires a different skill set.
Generally speaking stocks, gold, commodities and collectibles do well during inflation over a long enough time period. However, they will only be able to protect you when inflation is not high enough that society breaks into violence.
You cannot carry Gold and collectibles with you if you have to leave your home and move elsewhere in such an environment.
Your stock portfolio will tumble as companies cannot operate in such a hostile geopolitical environment.
However, you could be protected if you have a diversified stock portfolio in other countries.
You cannot trust law and judicial system that someone who illegally occupies your real estate will be vacated promptly.
Genuine cryptocurrencies like Bitcoin in self-custody are the only asset that can protect you in most scenarios.
But beware – most crypto projects are fraud and crypto does not act as an effective inflation hedge over a short time horizon.
Worst investment
- Save fiat in banks – Why do you want to save something that corrupt government officials can print as they fancy and distribute to their friends? Moreover, they can also seize your bank balances whenever they want.
- Government bonds – Why are you voluntarily giving away your money to such a government that is trying to steal from you and is responsible for putting you in such a miserable position in the first place? Moreover, governments will only use this money to fuck you.
- Other currencies – All countries are debasing their currencies. Why would you want to jump from one sinking ship to another sinking ship?
Step 2 - Untie yourself from fiat
Once you have protected whatever you have been able to accumulate till now. You should find a job whose pay gets adjusted according to inflation.
Most salaried employees lock in their salaries for long periods of time that do not get adjusted frequently with inflation.
Governments under-report inflation data as they have to increase the salaries of government employees based on this manipulated data.
I will recommend that you have your own online business that has minimal maintenance cost and is able to increase what it charges customers as per inflation. Such an online business catering to global audience is also shielded from domestic geopolitical disturbances.
I know everyone reading this would not be having such a business or skill. But it is important to make one – this is what I am personally trying to achieve with this blog.
Step 3 - Benefit from inflation - Take on leverage
This is most advanced step and is not absolutely necessary. This step also entails maximum risk and skills to execute.
We are in the lowest intrest rate environment in human history. Money is practically free. In most countries, intrest rate is even less than officially reported inflation figure.
This is the best time to take loan in human history. One can borrow money and pay back later when it has lost its value because of inflation.
However this is only possible if one is able to secure low fix rate long-term loan.
Moreover, I will not recommend everyone to take loan just for the sake of it unless you have a plan and have hedged your downside.
