The times are tough, right? Now before you throw in the towel, bowing to defeat in these turbulent economic times, lend me an ear. Sure, your money continually loses value with each passing day due to inflation, so you might also be worried about the future. But don’t fret; there is something you can do to guarantee yourself better coming days.
In fact, there is a lot you can do to insulate yourself from inflation and, better yet, make money with it. With that in mind, let’s take a closer look at some ten tried-and-proven ways the rich use to reap big with inflation. Please keep reading.
According to a recent study, the cost of living will rise by 1% in May 2022, owing to higher gas, rent, and food prices. As a result, the rate of inflation in the United States reached a forty-year high of 8.6 percent, implying that many Americans simply cannot afford staples at the moment! However, the rich appear to be living their best lives, benefiting from the high inflation. So, how do they do it? Rather, how do wealthy people make money with inflation?
1. They Invest in Real Estate
What do you think about real estate? Let me know in the comments. Meanwhile, I’ll tell you this. Real estate is one of the ways the rich make money during inflation, and let me just tell you why. Real estate, specifically, commercial real estate (CRE) or property meant to generate rent, allows you to profit despite inflation for one simple reason— as inflation rises, so do property value and rents.
I know you see it now. As property values surge due to inflation, the property values and rents enable the rich to maintain the real value of their properties while generating higher incomes over time. Even so, I must mention that the extent to which this occurs hinges on several factors, including the balance of supply and demand in the area around the property.
Granted, getting into the real estate business is no easy feat because it requires a lot of money upfront. And even if you can get started, you will need to dig deeper into your pocket to maintain your property. So, what to do? Perhaps the easiest way to invest in real estate is through real estate investment trusts (REITs) which give you share-based ownership of properties and their profits without having to deal with the actual on-the-ground issues.
2. They Buy Gold
Another way rich people make money with inflation is by buying gold. Here is what that is all about. See, when inflation picks up, people tend to flock to tangible assets like gold because they are likely to rise in value. That’s pretty much why gold has historically demonstrated a high degree of resiliency during prolonged periods of inflation.
As such, this means, at the very least, you won’t lose your money, which is something you want. Now, if you are considering investing in this precious yellow metal, you could buy bullion directly or invest indirectly through a mutual fund or exchange-traded fund (ETF) that owns gold.
3. They Invest in I Bonds
The increase in goods and services prices has made this one investment incredibly attractive — the Series I savings bonds. Otherwise known as “I bonds,” these investments earn you interest based on combining a fixed rate and an inflation rate. For this reason, they are an excellent way to protect your money against inflation.
Many rich people use I-bonds to hedge against inflation, ensuring that their cash does not lose purchasing power over time. But even with that said, it’s important to note that you can’t buy I bonds through a brokerage account.
Rather, you can only purchase these investments via the U.S. Treasury Department’s website. It’s also important that I draw your attention to the fact that you can’t buy over $10,000 in I bonds yearly.
4. They Invest in Stocks
The rich also use stocks to make money during inflation, and the idea behind it is pretty straightforward. See, stocks tend to keep pace with inflation, but even so, you shouldn’t be throwing your cash into just about every stock out there.
Instead, it is more advisable to direct your money into companies that can pass their rising input costs to customers, such as those in the consumer staples sector. So, essentially, you want to invest in stocks of companies that invest in things like food and energy — which are always in high demand — because they can price items higher while riding the wave of inflation. As such, you are guaranteed profits, even during tough times.
5. They Offer Debt or Loans
Another way the rich make money with inflation is through loans. And before you say anything, hear me out. You can always start offering leveraged loans, which are essentially loans extended to companies or people with considerable debt or bad credit.
The idea is that since leveraged loans are a floating-rate instrument, you, the lender, can raise the interest rate charged so that the return on investment (ROI) keeps up with inflation. And no, you do not have to do it alone. Rather, you can buy a mutual fund or ETF specializing in such income-generating products.
6. They buy More Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities, or TIPS for short, are simply inflation-protected bonds. Now, if you don’t know what a bond is, it’s basically a loan you, as the investor, give to the government or a corporate to be repaid at a future date, together with an agreed-upon interest.
Conventional bonds are classified as fixed-interest debt and so aren’t the best hedge against inflation. But the rich, being smart with their investments, put their money in TIPS. You see, TIPS are tied to the Consumer Price Index (CPI), which describes the rate at which prices increase across the economy or, in other words, inflation.
Now, what does this mean? When the CPI goes up, your TIPS investment is automatically adjusted to reflect the new value. That is to say, your base investment increases and, consequently, the interest you earn on it, even though the interest percentage doesn’t change.
TIPS can be bought directly through the US Treasury or an investment brokerage. Or you can buy them indirectly in an ETF or mutual fund.
7. They Take Full Advantage of Tax Efficiencies
If you’re investing or have been educating yourself about investing, then you probably know how much understanding tax laws and their obligations is. Tax efficiency is basically using all the legal channels to pay the least amount of taxes as the law obligates.
You are essentially tax efficient if you implement a strategy that results in you paying lower taxes than if you used alternative paths to get to the same goal. Now maximizing tax efficiency is a common strategy rich people use to protect their wealth during inflation, and you can too. Now you ask how?
Basically, you divide your investment in a way that reduces your tax burden. Remember, taxes can be “expensive” in the long run if you don’t invest carefully. On one side, you have investments that don’t lose much of their returns to taxes. They go to taxable accounts.
Then, assets whose returns attract considerable taxes go to tax-advantaged accounts, aka retirement accounts like Roth IRA. Basically, you protect your investment from high taxes at a time when inflation also threatens your returns.
8. They Source for Price-Secure Businesses
Inflation is characterized by one major thing- a rise in the prices of consumer goods. That means people’s spending power is diminished. Eventually, you start to reduce or cut out on things you don’t really need. But even as life gets tough, there are things you must always buy – prices notwithstanding.
A good example is groceries, fuel, utilities, and so on. Businesses that provide such products and services rarely suffer even when they raise prices. After all, you still got to eat, go to work, and generally survive.
So, when the value of money starts to plummet, the rich flock to such businesses, investing extensively in them. This way, they not only protect their money but actually become more prosperous, as the poor grow poorer as they pay more for essential goods and services.
9. They Value Invest
Now, I have already talked about investing in stocks. But, if you want to invest more wisely and respond to current trends appropriately, it’s time you familiarize yourself with value investing.
Now, to understand value investing, you need to understand something about stocks. The current market value you see of a stock doesn’t always show a true reflection of the company’s intrinsic value. There are many instances when a stock may be overvalued or undervalued. That is, trading above or below their intrinsic value.
Value investing is basically looking for undervalued “cheap” stocks and buying them. These stocks, which usually lag in market value, are also less sensitive to interest rate fluctuations. And as you know, raising the interest rates, like what we’re witnessing now, is how central banks respond to high inflation. Value stocks are also characterized by lower volatility and more stable revenues.
10. They Limit Their Cash Holdings
What comes to mind when you think of Elon Musk, Warren Buffet, Mark Zuckerberg, or any other billionaire? You probably believe they could buy anything they want with a debit card swipe. Well, they could afford most super-expensive things if they wanted to buy, but probably not as easy as taking cash from their checking account or safe at home.
Believe it or not, billionaires are cash poor. Apparently, the average billionaire holds only about 1% of their wealth in liquid assets like cash. Most of their wealth is in the assets and investments we covered in this article. So, what happens when inflation shoots? Rich people lower any cash holdings they may have and use that to increase stakes in inflation-safe securities.
There you have it – if you have been wondering how to keep afloat financially in these dire economic times, the best strategy is to grab a leaf from the rich. So, what would you add to the list that we’ve not covered? Drop your comments below.