Inflation is at the forefront of everyone’s mind as the most recent year-over-year Consumer Price Index (CPI) reading for December came in at 7.1%. The inflation reading was the highest in almost 40 years and is particularly concerning considering the most recent average hourly earnings data showing an increase of only 4.7%.
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While assets across the board from stocks to real estate appreciated more than the inflation rate over the past year, recent data from Gallup and the U.S. Census Bureau shows only 56% of Americans own stock, and only 65% of Americans own a home. This means a significant percentage of the American public is seeing a noticeable decrease in their standard of living due to a 2.4% decrease in their purchasing power with no assets to offset that loss.
The current level of inflation is unlikely to last forever. However, inflation will be more of an issue for the near future as governments struggle to deal with our nation’s debt and spending problems. Below are ways to prepare yourself for the battle with inflation to come.
Live Beneath Means/Avoid Unproductive Debt
Two big mistakes people make in confronting inflation are:
1) Living beyond their means
2) Accumulating unproductive debt
Reckless consumption is easier to identify and avoid, but unproductive debt is a bit trickier. Example: For years, society encouraged young people to pursue a college education because it gave them the best chance for success. While this statement is not false, unfortunately, it is incomplete as we failed to clarify that not all educations are equal. As a result, borrowers blindly pursued degrees with limited value, subsequently could not find employment paying sufficient wages, and therefore became straddled with an endless pile of debt.
According to the Education Data Initiative, student loan debt in the United States totals $1.75 trillion and grows at a rate six times faster than the nation’s economy. Scary huh?! Even more alarming is that 52% of borrowers do not feel their education was worth it. Now 53% of millennials cannot purchase a home due to unaffordability or because they do not qualify for financing. So, why is it so essential to live beneath your means and avoid unproductive debt?
Owning Assets Is a MUST
To stay ahead of inflation for the long term, you must OWN assets. Whether it is a business, stocks, real estate, art, precious metals, etc., your objective should be to own. As stated above in the opening paragraph, one cannot rely on wages/salary alone to win this battle. To stay ahead of the adverse effects of inflation, you must have help from your assets. You can do this successfully by living beneath your means and using the difference between what you make and what you spend to invest in high-quality assets.
In summary, you must find a diversified portfolio of assets and own them for the long term. Do not overthink it. This achievement will not come without great sacrifice, but I assure you that the freedom it will offer you long term is worth it. Be sure to consult with a financial planner to see what plan is right for you and your budget.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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