electric car SUV charging at home in front of modern low energy suburban house
Inflation has arrived, and it doesn’t appear to be going away anytime soon. Consumers are experiencing higher prices on food, gasoline, rent, and many other everyday goods and services. Many families are modifying their investment strategy by allocating capital to real assets like apartment buildings or to hard currencies like gold and bitcoin.
Setting aside investment strategies for a moment, is there anything you can do to combat inflation as a consumer? In fact, there’s plenty that you can do.
As inflation changes, so do people’s time preferences for their money. If you expect inflation to be lower in the future, you are more likely to delay gratification by saving and investing your money for the future. Conversely, if you expect inflation to increase, you are probably more inclined to spend your money today, perhaps because you fear that your money may buy less in the future. As such, it may be well worth considering making some common-sense changes to your personal financial planning approach, ranging from the way you finance your home to the kind of automobile you purchase to the way that you buy your food.
Now, if you think inflation will not stay high and will fall back down to the 1% to 2% range, it probably does not make sense to make any changes. However, suppose you are concerned that price increases will stay above 3% on average and that real (inflation-adjusted) interest rates will remain negative. In that case, you may want to reconsider some of your financial planning decisions, while making sure that they reflect your individual financial situation and personal tolerance for risk.
1. Buy Rather Than Rent
In an inflationary period, the rent vs. buy decision generally favors buying over renting your home. When you are a renter, your landlord will likely hike your rent at the level of inflation when your lease comes due each year, which might be fine when inflation is low, but it is much less desirable when inflation is high. As a renter, your housing costs are unprotected from inflation. In contrast, there are two strong reasons to buy your home. First, as a homeowner, your mortgage payments are generally fixed. Second, the replacement value of your home is likely to increase with inflation because the cost of land, materials, and labor are all rising with inflation. Being a homeowner …….